Most readers already know that China Dili Group (HKG: 1387) stock rose significantly 5.3% over the past week. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In particular, we will pay close attention to the ROE of China Dili Group today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for China Dili Group
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for China Dili Group is:
1.6% = CN Â¥ 226m CN Â¥ 14b (Based on the last twelve months to June 2021).
The âreturnâ is the amount earned after tax over the past twelve months. Another way to think about this is that for every HK $ 1 worth of equity, the business was able to earn HK $ 0.02 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or âwithholdsâ 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.
China Dili Group Profit Growth and 1.6% ROE
It is difficult to say that the ROE of China Dili Group is very good on its own. Even compared to the industry average of 9.2%, the ROE is quite disappointing. However, we are pleasantly surprised to see that China Dili Group has increased its net profit at a significant rate of 67% over the past five years. We believe that there could be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout rate.
We then compared the net income growth of China Dili Group with the industry and we are happy to see that the growth figure of the company is higher than that of the industry which has a growth rate of 13%. during the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. 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 China Dili Group is trading high P / E or low P / E, relative to its industry.
Is China Dili Group Efficiently Reinvesting Its Profits?
Since China Dili Group does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to develop its business.
Overall, we believe that China Dili Group has positive attributes. 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. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 2 risks we have identified for China Dili Group by visiting our risk dashboard for free on our platform here.
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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.