It is hard to get excited after looking at Chinese Universe Publishing and Media Group's (SHSE:600373) recent performance, when its stock has declined 6.8% over the past three months. 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. Specifically, we decided to study Chinese Universe Publishing and Media Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To Calculate Return On Equity?

Return on equity 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 Chinese Universe Publishing and Media Group is:

10% = CN¥2.0b ÷ CN¥19b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

What Has ROE Got To Do With 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 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.

Chinese Universe Publishing and Media Group's Earnings Growth And 10% ROE

On the face of it, Chinese Universe Publishing and Media Group's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 4.9% doesn't go unnoticed by us. Yet, Chinese Universe Publishing and Media Group has posted measly growth of 3.9% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay low.

As a next step, we compared Chinese Universe Publishing and Media Group's 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 1.8%.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 600373? You can find out in our latest intrinsic value infographic research report.

Is Chinese Universe Publishing and Media Group Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 48% (or a retention ratio of 52% over the past three years, Chinese Universe Publishing and Media Group has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Chinese Universe Publishing and Media Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 50%. As a result, Chinese Universe Publishing and Media Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 11% for future ROE.

Summary

In total, we are pretty happy with Chinese Universe Publishing and Media Group's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.