Most readers already know that shares of China Maple Leaf Educational Systems (HKG: 1317) rose significantly by 12% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of China Maple Leaf Educational Systems.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for China Maple Leaf Educational Systems
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for China Maple Leaf Educational Systems is:
9.7% = CN ¥ 467m CN ¥ 4.8b (Based on the last twelve months to February 2021).
The “return” is the amount earned after tax over the past twelve months. Another way to think about this is that for every HK $ 1 worth of equity, the company was able to make HK $ 0.10 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
China Maple Leaf Educational Systems profit growth and 9.7% ROE
For starters, China Maple Leaf Educational Systems appears to have a respectable ROE. And comparing with the industry, we found that the industry average ROE is similar to 10%. Therefore, this likely laid the groundwork for the decent 13% growth seen over the past five years by China Maple Leaf Educational Systems.
Then, comparing the net income growth of China Maple Leaf Educational Systems with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 12% over the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you are wondering about the valuation of China Maple Leaf Educational Systems, check out this indicator of its price / earnings ratio, relative to its industry.
Are China Maple Leaf’s education systems making efficient use of their profits?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. We deduce that the company has reinvested all its profits to develop its activity.
Overall, we think the performance of China Maple Leaf Educational Systems has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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