Inner Mongolia ERDOS Resources Co.,Ltd. (SHSE:900936) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

Simply Wall St · Sep 4, 2023 02:11

Inner Mongolia ERDOS ResourcesLtd (SHSE:900936) has had a rough three months with its share price down 25%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Inner Mongolia ERDOS ResourcesLtd

How Is ROE Calculated?

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:

18% = CN¥4.5b ÷ CN¥25b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.18.

What Has ROE Got To Do With 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.

A Side By Side comparison of Inner Mongolia ERDOS ResourcesLtd's Earnings Growth And 18% ROE

At first glance, Inner Mongolia ERDOS ResourcesLtd seems to have a decent ROE. On comparing with the average industry ROE of 7.1% the company's ROE looks pretty remarkable. This probably laid the ground for Inner Mongolia ERDOS ResourcesLtd's significant 40% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. 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 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 17%.

past-earnings-growth — SHSE:900936 Past Earnings Growth September 4th 2023

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Inner Mongolia ERDOS ResourcesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Inner Mongolia ERDOS ResourcesLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Inner Mongolia ERDOS ResourcesLtd is 45%, which is moderately low. The company is retaining the remaining 55%. So it seems that Inner Mongolia ERDOS ResourcesLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Inner Mongolia ERDOS ResourcesLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Inner Mongolia ERDOS ResourcesLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.