It is hard to get excited after looking at Inner Mongolia Junzheng Energy & Chemical GroupLtd's (SHSE:601216) recent performance, when its stock has declined 4.0% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

ROE 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 Junzheng Energy & Chemical GroupLtd is:

11% = CN¥2.8b ÷ CN¥27b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

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. 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.

A Side By Side comparison of Inner Mongolia Junzheng Energy & Chemical GroupLtd's Earnings Growth And 11% ROE

At first glance, Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. However, Inner Mongolia Junzheng Energy & Chemical GroupLtd's five year net income growth was quite low averaging at only 3.0%. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

Next, on comparing with the industry net income growth, we found that Inner Mongolia Junzheng Energy & Chemical GroupLtd's reported growth was lower than the industry growth of 6.2% over the last few years, which is not something we like 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Inner Mongolia Junzheng Energy & Chemical GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Inner Mongolia Junzheng Energy & Chemical GroupLtd Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 42% (implying that the company retains the remaining 58% of its income), Inner Mongolia Junzheng Energy & Chemical GroupLtd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Inner Mongolia Junzheng Energy & Chemical GroupLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we do feel that Inner Mongolia Junzheng Energy & Chemical GroupLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the 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. Our risks dashboard will have the 1 risk we have identified for Inner Mongolia Junzheng Energy & Chemical GroupLtd.

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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.