Is China Haisum Engineering Co., Ltd.'s (SZSE:002116) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Simply Wall St · 10/25/2024 23:04

China Haisum Engineering (SZSE:002116) has had a great run on the share market with its stock up by a significant 30% over the last three months. 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 China Haisum Engineering's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for China Haisum Engineering

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 China Haisum Engineering is:

14% = CN¥326m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.14.

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.

China Haisum Engineering's Earnings Growth And 14% ROE

To start with, China Haisum Engineering's ROE looks acceptable. On comparing with the average industry ROE of 6.6% the company's ROE looks pretty remarkable. Probably as a result of this, China Haisum Engineering was able to see an impressive net income growth of 33% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared China Haisum Engineering'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
SZSE:002116 Past Earnings Growth October 25th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about China Haisum Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Haisum Engineering Efficiently Re-investing Its Profits?

China Haisum Engineering has a three-year median payout ratio of 36% (where it is retaining 64% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and China Haisum Engineering is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, China Haisum Engineering has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 56% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

On the whole, we feel that China Haisum Engineering's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.