Chow Tai Seng Jewellery’s (SZSE:002867) stock is up by a considerable 24% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Chow Tai Seng Jewellery is:
20% = CN¥1.3b ÷ CN¥6.2b (Based on the trailing twelve months to September 2023).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.20 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Chow Tai Seng Jewellery’s Earnings Growth And 20% ROE
At first glance, Chow Tai Seng Jewellery seems to have a decent ROE. Especially when compared to the industry average of 6.3% the company’s ROE looks pretty impressive. This probably laid the ground for Chow Tai Seng Jewellery’s moderate 9.0% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Chow Tai Seng Jewellery’s growth is quite high when compared to the industry average growth of 3.3% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. 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. Is Chow Tai Seng Jewellery fairly valued compared to other companies? These might help you decide.
Is Chow Tai Seng Jewellery Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 59% (or a retention ratio of 41%) for Chow Tai Seng Jewellery suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.
Additionally, Chow Tai Seng Jewellery has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with 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 48%. Accordingly, forecasts suggest that Chow Tai Seng Jewellery’s future ROE will be 22% which is again, similar to the current ROE.
Conclusion
Overall, we are quite pleased with Chow Tai Seng Jewellery’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this
Valuation is complex, but we’re helping make it simple.
Find out whether Chow Tai Seng Jewellery is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Have feedback on this article? Concerned about the content? 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.