Kunming Chuan Jin Nuo Chemical's (SZSE:300505) stock is up by a considerable 32% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Kunming Chuan Jin Nuo Chemical's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Kunming Chuan Jin Nuo Chemical
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kunming Chuan Jin Nuo Chemical is:
16% = CN¥260m ÷ CN¥1.6b (Based on the trailing twelve months to March 2022).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of Kunming Chuan Jin Nuo Chemical's Earnings Growth And 16% ROE
At first glance, Kunming Chuan Jin Nuo Chemical seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.4%. Probably as a result of this, Kunming Chuan Jin Nuo Chemical was able to see a decent growth of 20% over the last five years.
Next, on comparing with the industry net income growth, we found that Kunming Chuan Jin Nuo Chemical's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.SZSE:300505 Past Earnings Growth May 10th 2022
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Kunming Chuan Jin Nuo Chemical is trading on a high P/E or a low P/E, relative to its industry.
Is Kunming Chuan Jin Nuo Chemical Efficiently Re- investing Its Profits?
Kunming Chuan Jin Nuo Chemical's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Kunming Chuan Jin Nuo Chemical has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.
Overall, we are quite pleased with Kunming Chuan Jin Nuo Chemical's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Kunming Chuan Jin Nuo Chemical.
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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.