Most readers would already know that Changjiang Publishing & MediaLtd's (SHSE:600757) stock increased by 6.0% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Changjiang Publishing & MediaLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Changjiang Publishing & MediaLtd is:

9.5% = CN¥892m ÷ CN¥9.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

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. 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.

Changjiang Publishing & MediaLtd's Earnings Growth And 9.5% ROE

When you first look at it, Changjiang Publishing & MediaLtd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 4.9%, is definitely interesting. Yet, Changjiang Publishing & MediaLtd has posted measly growth of 2.8% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

Next, on comparing with the industry net income growth, we found that Changjiang Publishing & MediaLtd's growth is quite high when compared to the industry average growth of 1.8% in the same period, which is great to see.

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. What is 600757 worth today? The intrinsic value infographic in our free research report helps visualize whether 600757 is currently mispriced by the market.

Is Changjiang Publishing & MediaLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 52% (that is, the company retains only 48% of its income) over the past three years for Changjiang Publishing & MediaLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Changjiang Publishing & MediaLtd has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, it does look like Changjiang Publishing & MediaLtd has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Changjiang Publishing & MediaLtd.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com