Country Garden Services Holdings Company Limited's (HKG:6098) Stock Been Rising: Are Strong Financials Guiding The Market?

By
Simply Wall St
Published
November 18, 2021
SEHK:6098
Source: Shutterstock

Country Garden Services Holdings' (HKG:6098) stock is up by 9.3% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Country Garden Services Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Country Garden Services 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 Country Garden Services Holdings is:

12% = CN¥3.7b ÷ CN¥31b (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Country Garden Services Holdings' Earnings Growth And 12% ROE

To start with, Country Garden Services Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.2%. This certainly adds some context to Country Garden Services Holdings' exceptional 48% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Country Garden Services Holdings' growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

past-earnings-growth
SEHK:6098 Past Earnings Growth November 18th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for 6098? You can find out in our latest intrinsic value infographic research report.

Is Country Garden Services Holdings Efficiently Re-investing Its Profits?

Country Garden Services Holdings' ' three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Country Garden Services Holdings has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 25% over the next three years. Regardless, the future ROE for Country Garden Services Holdings is speculated to rise to 25% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, we feel that Country Garden Services 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. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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