It is hard to get excited after looking at LIAONING ENERGY INDUSTRYLTD's (SHSE:600758) recent performance, when its stock has declined 12% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to LIAONING ENERGY INDUSTRYLTD's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for LIAONING ENERGY INDUSTRYLTD

How Do You 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 LIAONING ENERGY INDUSTRYLTD is:

3.6% = CN¥200m ÷ CN¥5.6b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of LIAONING ENERGY INDUSTRYLTD's Earnings Growth And 3.6% ROE

As you can see, LIAONING ENERGY INDUSTRYLTD's ROE looks pretty weak. Not just that, even compared to the industry average of 7.1%, the company's ROE is entirely unremarkable. Although, we can see that LIAONING ENERGY INDUSTRYLTD saw a modest net income growth of 18% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared LIAONING ENERGY INDUSTRYLTD's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.

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). 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 LIAONING ENERGY INDUSTRYLTD is trading on a high P/E or a low P/E, relative to its industry.

Is LIAONING ENERGY INDUSTRYLTD Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that LIAONING ENERGY INDUSTRYLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, LIAONING ENERGY INDUSTRYLTD is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

On the whole, we do feel that LIAONING ENERGY INDUSTRYLTD has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 LIAONING ENERGY INDUSTRYLTD 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.