Are Strong Financial Prospects The Force That Is Driving The Momentum In Shenzhen Pagoda Industrial (Group) Corporation Limited's HKG:2411) Stock?

Most readers would already be aware that Shenzhen Pagoda Industrial (Group)'s (HKG:2411) stock increased significantly by 11% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Shenzhen Pagoda Industrial (Group)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shenzhen Pagoda Industrial (Group)

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shenzhen Pagoda Industrial (Group) is:

10% = CN¥371m ÷ CN¥3.6b (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.10 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shenzhen Pagoda Industrial (Group)'s Earnings Growth And 10% ROE

To start with, Shenzhen Pagoda Industrial (Group)'s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.6%. This probably goes some way in explaining Shenzhen Pagoda Industrial (Group)'s significant 23% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Shenzhen Pagoda Industrial (Group)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is 2411 worth today? The intrinsic value infographic in our free research report helps visualize whether 2411 is currently mispriced by the market.

Is Shenzhen Pagoda Industrial (Group) Efficiently Re-investing Its Profits?

The three-year median payout ratio for Shenzhen Pagoda Industrial (Group) is 32%, which is moderately low. The company is retaining the remaining 68%. So it seems that Shenzhen Pagoda Industrial (Group) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Summary

In total, we are pretty happy with Shenzhen Pagoda Industrial (Group)'s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.