China Logistics Property Holdings (HKG:1589) has had a rough month with its share price down 8.4%. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. In this article, we decided to focus on China Logistics Property Holdings’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for China Logistics Property Holdings
How Is ROE Calculated?
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:
3.3% = CN¥429m ÷ CN¥13b (Based on the trailing twelve months to June 2021).
The ‘return’ is the yearly profit. So, this means that for every HK$1 of its shareholder’s investments, the company generates a profit of HK$0.03.
What Is The Relationship Between ROE And 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. 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 3.3% ROE
As you can see, China Logistics Property Holdings’ ROE looks pretty weak. Not just that, even compared to the industry average of 9.5%, the company’s ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 39% seen by China Logistics Property Holdings over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.
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 12% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is China Logistics Property Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is China Logistics Property Holdings Efficiently Re-investing Its Profits?
China Logistics Property Holdings doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Conclusion
On the whole, we feel that the performance shown by China Logistics Property Holdings can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. You can see the 4 risks we have identified for China Logistics Property Holdings by visiting our risks dashboard for free on our platform here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
