Is Shanghai Research Institute of Building Sciences Group Co., Ltd.'s (SHSE:603153) Latest Stock Performance A Reflection Of Its Financial Health?

Simply Wall St · 10/16 01:00

Shanghai Research Institute of Building Sciences Group (SHSE:603153) has had a great run on the share market with its stock up by a significant 16% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Shanghai Research Institute of Building Sciences Group's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shanghai Research Institute of Building Sciences Group

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 Shanghai Research Institute of Building Sciences Group is:

9.8% = CN¥355m ÷ CN¥3.6b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Shanghai Research Institute of Building Sciences Group's Earnings Growth And 9.8% ROE

On the face of it, Shanghai Research Institute of Building Sciences Group's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.8% which we definitely can't overlook. This probably goes some way in explaining Shanghai Research Institute of Building Sciences Group's moderate 11% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. 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.

We then compared Shanghai Research Institute of Building Sciences Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.0% in the same 5-year period.

past-earnings-growth
SHSE:603153 Past Earnings Growth October 16th 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shanghai Research Institute of Building Sciences Group is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Research Institute of Building Sciences Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Shanghai Research Institute of Building Sciences Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Along with seeing a growth in earnings, Shanghai Research Institute of Building Sciences Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Shanghai Research Institute of Building Sciences Group's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Shanghai Research Institute of Building Sciences Group.