Jinmao Property Services' (HKG:816) stock is up by a considerable 21% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Jinmao Property Services' ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Jinmao Property Services is:

23% = CN¥375m ÷ CN¥1.6b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.23 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Jinmao Property Services' Earnings Growth And 23% ROE

Firstly, we acknowledge that Jinmao Property Services has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 4.9% also doesn't go unnoticed by us. As a result, Jinmao Property Services' exceptional 34% net income growth seen over the past five years, doesn't come as a surprise.

Given that the industry shrunk its earnings at a rate of 1.0% over the last few years, the net income growth of the company is quite impressive.

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. Is Jinmao Property Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jinmao Property Services Using Its Retained Earnings Effectively?

Jinmao Property Services has a three-year median payout ratio of 42% (where it is retaining 58% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jinmao Property Services is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Jinmao Property Services only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. 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 40%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 21%.

Summary

On the whole, we feel that Jinmao Property Services' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.