Zhongman Petroleum and Natural Gas GroupLtd's (SHSE:603619) stock is up by a considerable 16% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Zhongman Petroleum and Natural Gas GroupLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Zhongman Petroleum and Natural Gas GroupLtd is:

28% = CN¥820m ÷ CN¥2.9b (Based on the trailing twelve months to September 2023).

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¥0.28 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Zhongman Petroleum and Natural Gas GroupLtd's Earnings Growth And 28% ROE

To begin with, Zhongman Petroleum and Natural Gas GroupLtd has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.2% also doesn't go unnoticed by us. Under the circumstances, Zhongman Petroleum and Natural Gas GroupLtd's considerable five year net income growth of 52% was to be expected.

Next, on comparing with the industry net income growth, we found that Zhongman Petroleum and Natural Gas GroupLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Zhongman Petroleum and Natural Gas GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhongman Petroleum and Natural Gas GroupLtd Making Efficient Use Of Its Profits?

Zhongman Petroleum and Natural Gas GroupLtd has a really low three-year median payout ratio of 24%, meaning that it has the remaining 76% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Zhongman Petroleum and Natural Gas GroupLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 16% over the next three years. The fact that the company's ROE is expected to rise to 36% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, we are pretty happy with Zhongman Petroleum and Natural Gas GroupLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.