Most readers already know that shares of Changsha Broad Homes Industrial Group (HKG: 2163) have risen significantly by 30% over the past month. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study the ROE of Changsha Broad Homes Industrial Group in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Changsha Broad Homes Industry Group
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Changsha Broad Homes Industrial Group is:
6.4% = CN ¥ 266m CN ¥ 4.2b (Based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every HK $ 1 of shareholder capital it has, the company has made HK $ 0.06 in profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Changsha Broad Homes Industrial Group Profit Growth and 6.4% ROE
When you first look at it, the ROE of Changsha Broad Homes Industrial Group does not look so attractive. Then, compared to the industry’s average ROE of 9.5%, the company’s ROE leaves us even less enthusiastic. However, the moderate 11% net income growth seen by Changsha Broad Homes Industrial Group over the past five years is definitely positive. So the company’s profit growth could probably have been caused by other variables. Such as – high profit retention or effective management in place.
Considering the fact that the industry’s profits fell 0.3% over the same period, the growth in the company’s net profit is quite remarkable.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. A 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 outlook. So, you might want to check whether Changsha Broad Homes Industrial Group is trading high P / E or low P / E, relative to its industry.
Is Changsha Broad Homes Industrial Group Efficiently Using Profits?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. We deduce that the company has reinvested all its profits to develop its activity.
Altogether, it seems that Changsha Broad Homes Industrial Group has positive aspects for its business. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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