Shanghai Pioneer Holding Ltd's (HKG:1345) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Shanghai Pioneer Holding's (HKG:1345) stock increased significantly by 11% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Shanghai Pioneer Holding's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Shanghai Pioneer Holding

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shanghai Pioneer Holding is:

13% = CN¥145m ÷ CN¥1.1b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.13 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shanghai Pioneer Holding's Earnings Growth And 13% ROE

To start with, Shanghai Pioneer Holding's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.2%. This certainly adds some context to Shanghai Pioneer Holding's exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Shanghai Pioneer Holding'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 12% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shanghai Pioneer Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Pioneer Holding Efficiently Re-investing Its Profits?

The three-year median payout ratio for Shanghai Pioneer Holding is 42%, which is moderately low. The company is retaining the remaining 58%. By the looks of it, the dividend is well covered and Shanghai Pioneer Holding is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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

Summary

In total, we are pretty happy with Shanghai Pioneer Holding's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings.

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

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.