Will Weakness in China Merchants Expressway Network & Technology Holdings Co.,Ltd.'s (SZSE:001965) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at China Merchants Expressway Network & Technology HoldingsLtd's (SZSE:001965) recent performance, when its stock has declined 8.4% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to China Merchants Expressway Network & Technology HoldingsLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

How To 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 China Merchants Expressway Network & Technology HoldingsLtd is:

8.4% = CN¥7.2b ÷ CN¥86b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings 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¥0.08 in profit.

What Has ROE Got To Do With 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.

China Merchants Expressway Network & Technology HoldingsLtd's Earnings Growth And 8.4% ROE

At first glance, China Merchants Expressway Network & Technology HoldingsLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.2% which we definitely can't overlook. This probably goes some way in explaining China Merchants Expressway Network & Technology HoldingsLtd's moderate 15% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared China Merchants Expressway Network & Technology HoldingsLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.0% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is China Merchants Expressway Network & Technology HoldingsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

China Merchants Expressway Network & Technology HoldingsLtd has a three-year median payout ratio of 49%, which implies that it retains the remaining 51% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, China Merchants Expressway Network & Technology HoldingsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

On the whole, we feel that China Merchants Expressway Network & Technology HoldingsLtd's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.