Yihai International Holding (HKG: 1579) shares have risen 15% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In this article, we have decided to focus on the ROE of Yihai International Holding.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Yihai International Holding
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Yihai International Holding is:
25% = CN ¥ 929m CN ¥ 3.7b (Based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. Another way of looking at it is that for every HK $ 1 worth of shares, the company was able to earn HK $ 0.25 in profit.
What does ROE have to do with 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 its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Yihai International Holding profit growth and 25% ROE
First, we recognize that Yihai International Holding has a significantly high ROE. Additionally, the company’s ROE is 11% higher than the industry average, which is quite remarkable. Under these circumstances, a significant five-year net profit growth of 34% for Yihai International Holding was to be expected.
In a next step, we compared the net income growth of Yihai International Holding with the industry and luckily we found that the growth observed by the company is higher than the industry average growth of 9.1 %.
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. This then helps him determine whether the stock is set for a bright or dark future. Has the market assessed the future outlook for 1579? You can find out in our latest Intrinsic Value infographic research report.
Is Yihai International Holding Efficiently Reinvesting Its Profits?
Yihai International Holding’s three-year median payout ratio is rather subdued at 26%, which means the company keeps 74% of its revenue. So it looks like Yihai International Holding is reinvesting effectively so as to record impressive profit growth (discussed above) and pay out a well-hedged dividend.
In addition, Yihai International Holding paid dividends over a period of four years. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 27%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 24%.
Overall, we think Yihai International Holding’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. 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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