Is China Merchants Expressway Network & Technology Holdings Co.,Ltd.'s (SZSE:001965) Recent Performance Tethered To Its Attractive Financial Prospects?

China Merchants Expressway Network & Technology HoldingsLtd's (SZSE:001965) stock is up by 6.5% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on China Merchants Expressway Network & Technology HoldingsLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for China Merchants Expressway Network & Technology HoldingsLtd

How Is ROE Calculated?

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 China Merchants Expressway Network & Technology HoldingsLtd is:

8.2% = CN¥7.2b ÷ CN¥88b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of China Merchants Expressway Network & Technology HoldingsLtd's Earnings Growth And 8.2% ROE

At first glance, China Merchants Expressway Network & Technology HoldingsLtd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.3%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by China Merchants Expressway Network & Technology HoldingsLtd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared China Merchants Expressway Network & Technology HoldingsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.5%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if China Merchants Expressway Network & Technology HoldingsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is China Merchants Expressway Network & Technology HoldingsLtd Efficiently Re-investing Its Profits?

China Merchants Expressway Network & Technology HoldingsLtd has a healthy combination of a moderate three-year median payout ratio of 49% (or a retention ratio of 51%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, China Merchants Expressway Network & Technology HoldingsLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with China Merchants Expressway Network & Technology HoldingsLtd's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.