Is China Resources Cement Holdings Limited's(HKG:1313) Recent Stock Performance Tethered To Its Strong Fundamentals?

China Resources Cement Holdings (HKG:1313) has had a great run on the share market with its stock up by a significant 13% over the last month. 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 China Resources Cement Holdings' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for China Resources Cement Holdings

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 China Resources Cement Holdings is:

13% = HK$6.9b ÷ HK$52b (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 China Resources Cement Holdings' Earnings Growth And 13% ROE

To begin with, China Resources Cement Holdings seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. Consequently, this likely laid the ground for the impressive net income growth of 27% seen over the past five years by China Resources Cement Holdings. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared China Resources Cement Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 28% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is China Resources Cement Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China Resources Cement Holdings Using Its Retained Earnings Effectively?

China Resources Cement Holdings has a three-year median payout ratio of 48% (where it is retaining 52% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and China Resources Cement Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, China Resources Cement Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 50%. Accordingly, forecasts suggest that China Resources Cement Holdings' future ROE will be 15% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with China Resources Cement Holdings' 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.