Qian Jiang Water Resources Development Co.,Ltd's (SHSE:600283) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Qian Jiang Water Resources DevelopmentLtd (SHSE:600283) has had a rough three months with its share price down 21%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Qian Jiang Water Resources DevelopmentLtd's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Qian Jiang Water Resources DevelopmentLtd

How Is ROE Calculated?

Return on equity 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 Qian Jiang Water Resources DevelopmentLtd is:

8.3% = CN¥256m ÷ CN¥3.1b (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¥0.08 in profit.

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. 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.

Qian Jiang Water Resources DevelopmentLtd's Earnings Growth And 8.3% ROE

On the face of it, Qian Jiang Water Resources DevelopmentLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.2%, so we won't completely dismiss the company. Particularly, the exceptional 29% net income growth seen by Qian Jiang Water Resources DevelopmentLtd over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Qian Jiang Water Resources DevelopmentLtd'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 1.7% in the same 5-year period.

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. 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 Qian Jiang Water Resources DevelopmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Qian Jiang Water Resources DevelopmentLtd Making Efficient Use Of Its Profits?

Qian Jiang Water Resources DevelopmentLtd has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Qian Jiang Water Resources DevelopmentLtd is reinvesting its earnings efficiently.

Additionally, Qian Jiang Water Resources DevelopmentLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Qian Jiang Water Resources DevelopmentLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Qian Jiang Water Resources DevelopmentLtd visit our risks dashboard for free.

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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.