Nantong Xingqiu Graphite Co.,Ltd.'s (SHSE:688633) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Simply Wall St · 5d ago

Nantong Xingqiu GraphiteLtd's (SHSE:688633) stock is up by a considerable 12% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Nantong Xingqiu GraphiteLtd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Nantong Xingqiu GraphiteLtd

How To Calculate Return On Equity?

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 Nantong Xingqiu GraphiteLtd is:

8.8% = CN¥136m ÷ CN¥1.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Has ROE Got To Do With 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.

Nantong Xingqiu GraphiteLtd's Earnings Growth And 8.8% ROE

On the face of it, Nantong Xingqiu GraphiteLtd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 7.0% doesn't go unnoticed by us. Having said that, Nantong Xingqiu GraphiteLtd's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

We then compared Nantong Xingqiu GraphiteLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.8% in the same 5-year period, which is a bit concerning.

past-earnings-growth
SHSE:688633 Past Earnings Growth September 27th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Nantong Xingqiu GraphiteLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nantong Xingqiu GraphiteLtd Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 25% (meaning the company retains75% of profits) in the last three-year period, Nantong Xingqiu GraphiteLtd's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Nantong Xingqiu GraphiteLtd only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Nantong Xingqiu GraphiteLtd has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.