With its stock down 13% over the past month, it is easy to disregard Jinneng Holding Shanxi Coal Industryltd (SHSE:601001). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Jinneng Holding Shanxi Coal Industryltd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Jinneng Holding Shanxi Coal Industryltd is:

18% = CN¥4.5b ÷ CN¥26b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.18 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Jinneng Holding Shanxi Coal Industryltd's Earnings Growth And 18% ROE

To start with, Jinneng Holding Shanxi Coal Industryltd's ROE looks acceptable. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This probably laid the ground for Jinneng Holding Shanxi Coal Industryltd's significant 29% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Jinneng Holding Shanxi Coal Industryltd's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 601001 worth today? The intrinsic value infographic in our free research report helps visualize whether 601001 is currently mispriced by the market.

Is Jinneng Holding Shanxi Coal Industryltd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Jinneng Holding Shanxi Coal Industryltd is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Jinneng Holding Shanxi Coal Industryltd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Jinneng Holding Shanxi Coal Industryltd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Jinneng Holding Shanxi Coal Industryltd'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com