Will Weakness in Beijing New Building Materials Public Limited Company’s (SZSE:000786) Stock Prove Temporary Given Strong Fundamentals?
Beijing New Building Materials (SZSE:000786) has had a rough month with its share price down 9.4%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Beijing New Building Materials’ ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Beijing New Building Materials
How To 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 Beijing New Building Materials is:
15% = CN¥3.8b ÷ CN¥25b (Based on the trailing twelve months to March 2024).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders’ capital it has, the company made CN¥0.15 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Beijing New Building Materials’ Earnings Growth And 15% ROE
To begin with, Beijing New Building Materials seems to have a respectable ROE. Especially when compared to the industry average of 8.3% the company’s ROE looks pretty impressive. Probably as a result of this, Beijing New Building Materials was able to see an impressive net income growth of 23% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Beijing New Building Materials’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.2%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. What is 000786 worth today? The intrinsic value infographic in our free research report helps visualize whether 000786 is currently mispriced by the market.
Is Beijing New Building Materials Efficiently Re-investing Its Profits?
Beijing New Building Materials has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. So it seems that Beijing New Building Materials is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Moreover, Beijing New Building Materials is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 36%. Accordingly, forecasts suggest that Beijing New Building Materials’ future ROE will be 17% which is again, similar to the current ROE.
Conclusion
In total, we are pretty happy with Beijing New Building Materials’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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