Hainan Strait Shipping Co.,Ltd. (SZSE:002320) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Hainan Strait ShippingLtd (SZSE:002320) has had a rough week with its share price down 3.6%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Hainan Strait ShippingLtd's ROE.

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.

View our latest analysis for Hainan Strait ShippingLtd

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 Hainan Strait ShippingLtd is:

19% = CN¥1.3b ÷ CN¥6.6b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.19.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Hainan Strait ShippingLtd's Earnings Growth And 19% ROE

To start with, Hainan Strait ShippingLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.6%. This certainly adds some context to Hainan Strait ShippingLtd's decent 11% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Hainan Strait ShippingLtd's reported growth was lower than the industry growth of 16% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Hainan Strait ShippingLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hainan Strait ShippingLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 66% (or a retention ratio of 34%) for Hainan Strait ShippingLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Hainan Strait ShippingLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Hainan Strait ShippingLtd certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Hainan Strait ShippingLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.