Gansu Energy Chemical Co., Ltd.'s (SZSE:000552) Stock Is Going Strong: Have Financials A Role To Play?

Simply Wall St · 10/15 01:23

Most readers would already be aware that Gansu Energy Chemical's (SZSE:000552) stock increased significantly by 30% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Gansu Energy Chemical's ROE today.

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.

View our latest analysis for Gansu Energy Chemical

How To Calculate Return On Equity?

ROE 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 Gansu Energy Chemical is:

7.9% = CN¥1.4b ÷ CN¥17b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 in profit.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Gansu Energy Chemical's Earnings Growth And 7.9% ROE

When you first look at it, Gansu Energy Chemical's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.5%, we may spare it some thought. Particularly, the exceptional 30% net income growth seen by Gansu Energy Chemical over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Gansu Energy Chemical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

past-earnings-growth
SZSE:000552 Past Earnings Growth October 15th 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. 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 Gansu Energy Chemical is trading on a high P/E or a low P/E, relative to its industry.

Is Gansu Energy Chemical Using Its Retained Earnings Effectively?

Gansu Energy Chemical's three-year median payout ratio is a pretty moderate 27%, meaning the company retains 73% of its income. So it seems that Gansu Energy Chemical is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Gansu Energy Chemical has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Gansu Energy Chemical has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.