Most readers would already know that Henan Shenhuo Coal Industry and Electricity Power's (SZSE:000933) stock increased by 8.4% over the past three months. Since the market usually pay for a company's long-term financial health, we decided to study the company's fundamentals to see if they could be influencing the market. In this article, we decided to focus on Henan Shenhuo Coal Industry and Electricity Power's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

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 Henan Shenhuo Coal Industry and Electricity Power is:

23% = CN¥6.0b ÷ CN¥26b (Based on the trailing twelve months to September 2024).

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¥0.23 in profit.

What Is The Relationship Between ROE And 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.

Henan Shenhuo Coal Industry and Electricity Power's Earnings Growth And 23% ROE

To begin with, Henan Shenhuo Coal Industry and Electricity Power has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.5% also doesn't go unnoticed by us. As a result, Henan Shenhuo Coal Industry and Electricity Power's exceptional 34% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Henan Shenhuo Coal Industry and Electricity Power's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.8% in the same 5-year period.

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. If you're wondering about Henan Shenhuo Coal Industry and Electricity Power's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Henan Shenhuo Coal Industry and Electricity Power Efficiently Re-investing Its Profits?

The three-year median payout ratio for Henan Shenhuo Coal Industry and Electricity Power is 31%, which is moderately low. The company is retaining the remaining 69%. By the looks of it, the dividend is well covered and Henan Shenhuo Coal Industry and Electricity Power is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Henan Shenhuo Coal Industry and Electricity Power has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 22% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with Henan Shenhuo Coal Industry and Electricity Power's performance. 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. 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.