C&D Holsin Engineering Consulting Co., Ltd's (SHSE:603909) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Simply Wall St · 10/19 00:11

C&D Holsin Engineering Consulting (SHSE:603909) has had a great run on the share market with its stock up by a significant 32% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on C&D Holsin Engineering Consulting's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for C&D Holsin Engineering Consulting

How To 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 C&D Holsin Engineering Consulting is:

8.9% = CN¥102m ÷ CN¥1.1b (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¥0.09.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

C&D Holsin Engineering Consulting's Earnings Growth And 8.9% ROE

When you first look at it, C&D Holsin Engineering Consulting's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.4% doesn't go unnoticed by us. Having said that, C&D Holsin Engineering Consulting's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

As a next step, we compared C&D Holsin Engineering Consulting's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 1.0% in the same period.

past-earnings-growth
SHSE:603909 Past Earnings Growth October 19th 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about C&D Holsin Engineering Consulting's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is C&D Holsin Engineering Consulting Making Efficient Use Of Its Profits?

C&D Holsin Engineering Consulting has a low three-year median payout ratio of 21% (or a retention ratio of 79%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, C&D Holsin Engineering Consulting has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we feel that C&D Holsin Engineering Consulting certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.