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It is hard to get excited after looking at Yangzijiang Shipbuilding (Holdings)'s (SGX:BS6) recent performance, when its stock has declined 5.2% over the past week. 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 Yangzijiang Shipbuilding (Holdings)'s ROE today.
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.
View our latest analysis for Yangzijiang Shipbuilding (Holdings)
How To 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 Yangzijiang Shipbuilding (Holdings) is:
24% = CN¥5.4b ÷ CN¥23b (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.24 in profit.
Why Is ROE Important For 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 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 Yangzijiang Shipbuilding (Holdings)'s Earnings Growth And 24% ROE
First thing first, we like that Yangzijiang Shipbuilding (Holdings) has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.6% which is quite remarkable. Probably as a result of this, Yangzijiang Shipbuilding (Holdings) was able to see a decent net income growth of 10% over the last five years.
We then performed a comparison between Yangzijiang Shipbuilding (Holdings)'s net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Yangzijiang Shipbuilding (Holdings)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.