Most readers would already be aware that Yunnan Lincang Xinyuan Germanium IndustryLTD's (SZSE:002428) stock increased significantly by 66% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Yunnan Lincang Xinyuan Germanium IndustryLTD's ROE in this article.

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.

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 Yunnan Lincang Xinyuan Germanium IndustryLTD is:

2.6% = CN¥40m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Yunnan Lincang Xinyuan Germanium IndustryLTD's Earnings Growth And 2.6% ROE

As you can see, Yunnan Lincang Xinyuan Germanium IndustryLTD's ROE looks pretty weak. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. However, the moderate 7.3% net income growth seen by Yunnan Lincang Xinyuan Germanium IndustryLTD over the past five years is definitely a positive. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Yunnan Lincang Xinyuan Germanium IndustryLTD's reported growth was lower than the industry growth of 9.8% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Yunnan Lincang Xinyuan Germanium IndustryLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yunnan Lincang Xinyuan Germanium IndustryLTD Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 240% for Yunnan Lincang Xinyuan Germanium IndustryLTD suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings respectably, as we saw above. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. Our risks dashboard should have the 2 risks we have identified for Yunnan Lincang Xinyuan Germanium IndustryLTD.

Moreover, Yunnan Lincang Xinyuan Germanium IndustryLTD 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.

Conclusion

Overall, we would be extremely cautious before making any decision on Yunnan Lincang Xinyuan Germanium IndustryLTD. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.