Most readers would already be aware that Minmetals Development's (SHSE:600058) stock increased significantly by 28% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Minmetals Development's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To 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 Minmetals Development is:

2.0% = CN¥152m ÷ CN¥7.7b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 in profit.

What Is The Relationship Between ROE And 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. 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.

Minmetals Development's Earnings Growth And 2.0% ROE

It is quite clear that Minmetals Development's ROE is rather low. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Minmetals Development's very little net income growth of 2.2% over the past five years.

We then compared Minmetals Development's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.7% in the same 5-year period, which is a bit concerning.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Minmetals Development's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Minmetals Development Efficiently Re-investing Its Profits?

Minmetals Development doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. However, this doesn't explain the low earnings growth the company has seen. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

Overall, we have mixed feelings about Minmetals Development. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Minmetals Development visit our risks dashboard for free.

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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.