With its stock down 3.1% over the past three months, it is easy to disregard Yangzijiang Shipbuilding (Holdings) (SGX:BS6). 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. In this article, we decided to focus on Yangzijiang Shipbuilding (Holdings)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 amount earned after tax over the last twelve months. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.24.

What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Yangzijiang Shipbuilding (Holdings)'s Earnings Growth And 24% ROE

Firstly, we acknowledge that Yangzijiang Shipbuilding (Holdings) has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 7.0% also doesn't go unnoticed by us. 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.

Next, on comparing with the industry net income growth, we found that Yangzijiang Shipbuilding (Holdings)'s reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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.

Is Yangzijiang Shipbuilding (Holdings) Using Its Retained Earnings Effectively?

Yangzijiang Shipbuilding (Holdings) has a healthy combination of a moderate three-year median payout ratio of 34% (or a retention ratio of 66%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Yangzijiang Shipbuilding (Holdings) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 23%.

Conclusion

Overall, we are quite pleased with Yangzijiang Shipbuilding (Holdings)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.