Yechiu Metal Recycling (China)'s (SHSE:601388) stock is up by a considerable 7.6% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Yechiu Metal Recycling (China)'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Yechiu Metal Recycling (China)

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 Yechiu Metal Recycling (China) is:

7.2% = CN¥306m ÷ CN¥4.3b (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 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. 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.

Yechiu Metal Recycling (China)'s Earnings Growth And 7.2% ROE

When you first look at it, Yechiu Metal Recycling (China)'s ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.5%. Moreover, we are quite pleased to see that Yechiu Metal Recycling (China)'s net income grew significantly at a rate of 32% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Yechiu Metal Recycling (China)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 17%.

Earnings growth is an important metric to consider when valuing a stock. 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 Yechiu Metal Recycling (China) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yechiu Metal Recycling (China) Efficiently Re-investing Its Profits?

Yechiu Metal Recycling (China)'s ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it looks like Yechiu Metal Recycling (China) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Yechiu Metal Recycling (China) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Yechiu Metal Recycling (China) certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Yechiu Metal Recycling (China) 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.