Are Strong Financial Prospects The Force That Is Driving The Momentum In China Maple Leaf Educational Systems Limited's HKG:1317) Stock?

China Maple Leaf Educational Systems (HKG:1317) has had a great run on the share market with its stock up by a significant 23% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study China Maple Leaf Educational Systems' ROE in this article.

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

Check out our latest analysis for China Maple Leaf Educational Systems

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 Maple Leaf Educational Systems is:

11% = CN¥509m ÷ CN¥4.6b (Based on the trailing twelve months to August 2020).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.11 in profit.

What Is The Relationship Between ROE And 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. 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.

China Maple Leaf Educational Systems' Earnings Growth And 11% ROE

At first glance, China Maple Leaf Educational Systems seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to China Maple Leaf Educational Systems' moderate 19% net income growth seen over the past five years.

Next, on comparing China Maple Leaf Educational Systems' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Maple Leaf Educational Systems is trading on a high P/E or a low P/E, relative to its industry.

Is China Maple Leaf Educational Systems Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 31% over the next three years. As a result, the expected drop in China Maple Leaf Educational Systems' payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.

Summary

In total, we are pretty happy with China Maple Leaf Educational Systems' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you’re looking to trade China Maple Leaf Educational Systems, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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