Ningxia Baofeng Energy Group (SHSE:600989) has had a great run on the share market with its stock up by a significant 7.1% over the last month. 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. Particularly, we will be paying attention to Ningxia Baofeng Energy Group's ROE today.

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 Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ningxia Baofeng Energy Group is:

15% = CN¥5.9b ÷ CN¥40b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.15.

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. 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.

A Side By Side comparison of Ningxia Baofeng Energy Group's Earnings Growth And 15% ROE

To begin with, Ningxia Baofeng Energy Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.4%. This probably laid the ground for Ningxia Baofeng Energy Group's moderate 8.9% net income growth seen over the past five years.

As a next step, we compared Ningxia Baofeng Energy Group'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 7.8% in the same period.

Earnings growth is a huge factor in stock valuation. 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. What is 600989 worth today? The intrinsic value infographic in our free research report helps visualize whether 600989 is currently mispriced by the market.

Is Ningxia Baofeng Energy Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Ningxia Baofeng Energy Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Ningxia Baofeng Energy Group is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Still, forecasts suggest that Ningxia Baofeng Energy Group's future ROE will rise to 25% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Ningxia Baofeng Energy Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

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