Declining Stock and Decent Financials: Is The Market Wrong About Jiangsu Expressway Company Limited (HKG:177)?

Jiangsu Expressway (HKG:177) has had a rough month with its share price down 4.3%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Jiangsu Expressway's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangsu Expressway

How Is ROE Calculated?

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 Jiangsu Expressway is:

8.1% = CN¥2.6b ÷ CN¥32b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.08 in profit.

Why Is ROE Important For Earnings Growth?

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

Jiangsu Expressway's Earnings Growth And 8.1% ROE

When you first look at it, Jiangsu Expressway's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.6%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 5.3% seen over the past five years by Jiangsu Expressway. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Jiangsu Expressway's 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 5.3% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangsu Expressway fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Expressway Using Its Retained Earnings Effectively?

While Jiangsu Expressway has a three-year median payout ratio of 56% (which means it retains 44% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Jiangsu Expressway is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. Still, forecasts suggest that Jiangsu Expressway's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Jiangsu Expressway has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.
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