Do Its Financials Have Any Role To Play In Driving Shougang Fushan Resources Group Limited’s (HKG:639) Stock Up Recently?
Shougang Fushan Resources Group’s (HKG:639) stock is up by a considerable 26% over the past 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 Shougang Fushan Resources Group’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
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 Shougang Fushan Resources Group is:
16% = HK$3.1b ÷ HK$19b (Based on the trailing twelve months to December 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$0.16 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. 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.
Shougang Fushan Resources Group’s Earnings Growth And 16% ROE
To begin with, Shougang Fushan Resources Group seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 12%. This probably laid the ground for Shougang Fushan Resources Group’s moderate 17% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Shougang Fushan Resources Group’s reported growth was lower than the industry growth of 24% in the same period, which is not something we like to see.
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. What is 639 worth today? The intrinsic value infographic in our free research report helps visualize whether 639 is currently mispriced by the market.
Is Shougang Fushan Resources Group Making Efficient Use Of Its Profits?
Shougang Fushan Resources Group has a significant three-year median payout ratio of 81%, meaning that it is left with only 19% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, Shougang Fushan Resources Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 27% over the next three years. Still forecasts suggest that Shougang Fushan Resources Group’s future ROE will drop to 9.9% even though the the company’s payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company’s ROE.
On the whole, we do feel that Shougang Fushan Resources Group has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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.