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Is Chengxin Lithium Group Co., Ltd.'s (SZSE:002240) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Simply Wall St ·  08/17 10:10

Chengxin Lithium Group (SZSE:002240) has had a great run on the share market with its stock up by a significant 25% over the last 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. Particularly, we will be paying attention to Chengxin Lithium Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Chengxin Lithium Group

How Do You 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 Chengxin Lithium Group is:

44% = CN¥3.6b ÷ CN¥8.1b (Based on the trailing twelve months to June 2022).

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¥0.44 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Chengxin Lithium Group's Earnings Growth And 44% ROE

First thing first, we like that Chengxin Lithium Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.8% also doesn't go unnoticed by us. So, the substantial 75% net income growth seen by Chengxin Lithium Group over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Chengxin Lithium Group's growth is quite high when compared to the industry average growth of 9.7% in the same period, which is great to see.

past-earnings-growthSZSE:002240 Past Earnings Growth August 17th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Chengxin Lithium Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chengxin Lithium Group Efficiently Re- investing Its Profits?

Chengxin Lithium Group's three-year median payout ratio to shareholders is 4.5%, which is quite low. This implies that the company is retaining 96% of its profits. So it looks like Chengxin Lithium Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Summary

In total, we are pretty happy with Chengxin Lithium Group'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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