Southern Publishing and MediaLtd (SHSE:601900) has had a great run on the share market with its stock up by a significant 50% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Southern Publishing and MediaLtd's ROE.

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.

How Do You 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 Southern Publishing and MediaLtd is:

15% = CN¥1.2b ÷ CN¥8.2b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Southern Publishing and MediaLtd's Earnings Growth And 15% ROE

At first glance, Southern Publishing and MediaLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.1%. This certainly adds some context to Southern Publishing and MediaLtd's decent 9.7% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Southern Publishing and MediaLtd's growth is quite high when compared to the industry average growth of 1.7% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Southern Publishing and MediaLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Southern Publishing and MediaLtd Making Efficient Use Of Its Profits?

Southern Publishing and MediaLtd has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) 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, Southern Publishing and MediaLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Southern Publishing and MediaLtd's performance has been quite good. 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 sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.