Is Inner Mongolia ERDOS Resources Co.,Ltd.'s (SHSE:900936) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Simply Wall St · Feb 15, 2023 01:35

Most readers would already be aware that Inner Mongolia ERDOS ResourcesLtd's (SHSE:900936) stock increased significantly by 17% 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. In this article, we decided to focus on Inner Mongolia ERDOS ResourcesLtd's ROE.

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.

See our latest analysis for Inner Mongolia ERDOS ResourcesLtd

How To Calculate Return On Equity?

Return on equity 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 Inner Mongolia ERDOS ResourcesLtd is:

36% = CN¥9.3b ÷ CN¥26b (Based on the trailing twelve months to September 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.36 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. 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. 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.

Inner Mongolia ERDOS ResourcesLtd's Earnings Growth And 36% ROE

First thing first, we like that Inner Mongolia ERDOS ResourcesLtd has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 8.4% which is quite remarkable. Under the circumstances, Inner Mongolia ERDOS ResourcesLtd's considerable five year net income growth of 54% was to be expected.

As a next step, we compared Inner Mongolia ERDOS ResourcesLtd'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 18%.

past-earnings-growth — SHSE:900936 Past Earnings Growth February 15th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Inner Mongolia ERDOS ResourcesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Inner Mongolia ERDOS ResourcesLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Inner Mongolia ERDOS ResourcesLtd is 43%, which is moderately low. The company is retaining the remaining 57%. By the looks of it, the dividend is well covered and Inner Mongolia ERDOS ResourcesLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Inner Mongolia ERDOS ResourcesLtd 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

In total, we are pretty happy with Inner Mongolia ERDOS ResourcesLtd'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Inner Mongolia ERDOS ResourcesLtd.

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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.