Are Robust Financials Driving The Recent Rally In China Overseas Property Holdings Limited's (HKG:2669) Stock?

China Overseas Property Holdings' (HKG:2669) stock is up by a considerable 10% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to China Overseas Property Holdings' ROE today.

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

See our latest analysis for China Overseas Property Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for China Overseas Property Holdings is:

31% = CN¥1.5b ÷ CN¥4.7b (Based on the trailing twelve months to June 2024).

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$0.31 in profit.

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What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

China Overseas Property Holdings' Earnings Growth And 31% ROE

To begin with, China Overseas Property Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 5.4% the company's ROE is quite impressive. As a result, China Overseas Property Holdings' exceptional 26% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that the growth figure reported by China Overseas Property Holdings compares quite favourably to the industry average, which shows a decline of 1.2% over the last few years.

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. If you're wondering about China Overseas Property Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Overseas Property Holdings Using Its Retained Earnings Effectively?

China Overseas Property Holdings 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. So it seems that China Overseas Property Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, China Overseas Property Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 34% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 28%.

Conclusion

On the whole, we feel that China Overseas Property Holdings' performance has been quite good. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.