Sinotrans Limited's (HKG:598) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Sinotrans (HKG:598) has had a great run on the share market with its stock up by a significant 19% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Sinotrans' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Sinotrans is:

9.8% = CN¥4.2b ÷ CN¥43b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.

See our latest analysis for Sinotrans

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. 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.

Sinotrans' Earnings Growth And 9.8% ROE

When you first look at it, Sinotrans' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.7%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 5.7% seen over the past five years by Sinotrans. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Sinotrans' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 22% 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 598 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sinotrans Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 52% (or a retention ratio of 48%) for Sinotrans suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Sinotrans 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 57%. As a result, Sinotrans' ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.3% for future ROE.

Conclusion

Overall, we feel that Sinotrans certainly does have some positive factors to consider. True, the company has posted a respectable growth in earnings. However, the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paying out less dividends. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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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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.