Does The Market Have A Low Tolerance For CITIC Offshore Helicopter Co., Ltd.'s (SZSE:000099) Mixed Fundamentals?

With its stock down 21% over the past three months, it is easy to disregard CITIC Offshore Helicopter (SZSE:000099). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study CITIC Offshore Helicopter's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for CITIC Offshore Helicopter

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CITIC Offshore Helicopter is:

4.8% = CN¥256m ÷ CN¥5.3b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

CITIC Offshore Helicopter's Earnings Growth And 4.8% ROE

It is quite clear that CITIC Offshore Helicopter's ROE is rather low. Even compared to the average industry ROE of 7.9%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to CITIC Offshore Helicopter's very little net income growth of 3.2% over the past five years.

We then compared CITIC Offshore Helicopter's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 000099 worth today? The intrinsic value infographic in our free research report helps visualize whether 000099 is currently mispriced by the market.

Is CITIC Offshore Helicopter Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 24% (implying that the company retains the remaining 76% of its income) suggests that CITIC Offshore Helicopter is retaining most of its profits. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, CITIC Offshore Helicopter has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about CITIC Offshore Helicopter. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.