Most readers would already be aware that Wanguo International Mining Group's (HKG:3939) stock increased significantly by 72% 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. In this article, we decided to focus on Wanguo International Mining Group's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You 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 Wanguo International Mining Group is:

22% = CN¥391m ÷ CN¥1.8b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.22.

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.

A Side By Side comparison of Wanguo International Mining Group's Earnings Growth And 22% ROE

First thing first, we like that Wanguo International Mining Group has an impressive ROE. Secondly, even when compared to the industry average of 9.8% the company's ROE is quite impressive. As a result, Wanguo International Mining Group's exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Wanguo International Mining Group'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 17%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Wanguo International Mining Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wanguo International Mining Group Using Its Retained Earnings Effectively?

The three-year median payout ratio for Wanguo International Mining Group is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Wanguo International Mining Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Wanguo International Mining Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that Wanguo International Mining Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.

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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.