China Logistics Property Holdings’ (HKG:1589) stock is up by a considerable 28% over the past three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study China Logistics Property Holdings’ 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for China Logistics Property Holdings
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for China Logistics Property Holdings is:
3.6% = CN¥423m ÷ CN¥12b (Based on the trailing twelve months to December 2019).
The ‘return’ is the yearly profit. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$0.04 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
China Logistics Property Holdings’ Earnings Growth And 3.6% ROE
It is hard to argue that China Logistics Property Holdings’ ROE is much good in and of itself. Not just that, even compared to the industry average of 8.3%, the company’s ROE is entirely unremarkable. For this reason, China Logistics Property Holdings’ five year net income decline of 16% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
That being said, we compared China Logistics Property Holdings’ performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 15% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. What is 1589 worth today? The intrinsic value infographic in our free research report helps visualize whether 1589 is currently mispriced by the market.
Is China Logistics Property Holdings Making Efficient Use Of Its Profits?
Because China Logistics Property Holdings doesn’t pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Summary
In total, we’re a bit ambivalent about China Logistics Property Holdings’ performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for China Logistics Property Holdings visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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