Most readers would already be aware that Chifeng Jilong Gold MiningLtd's (SHSE:600988) stock increased significantly by 51% 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. Specifically, we decided to study Chifeng Jilong Gold MiningLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Chifeng Jilong Gold MiningLtd is:

10% = CN¥871m ÷ CN¥8.5b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

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.

Chifeng Jilong Gold MiningLtd's Earnings Growth And 10% ROE

When you first look at it, Chifeng Jilong Gold MiningLtd's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 7.6% which we definitely can't overlook. Particularly, the substantial 26% net income growth seen by Chifeng Jilong Gold MiningLtd over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Chifeng Jilong Gold MiningLtd'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 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. 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 Chifeng Jilong Gold MiningLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Chifeng Jilong Gold MiningLtd Using Its Retained Earnings Effectively?

Chifeng Jilong Gold MiningLtd's three-year median payout ratio to shareholders is 10%, which is quite low. This implies that the company is retaining 90% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 11% of its profits over the next three years. Regardless, the future ROE for Chifeng Jilong Gold MiningLtd is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Summary

In total, we are pretty happy with Chifeng Jilong Gold MiningLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.