Most readers would already be aware that Jiangxi Hongcheng EnvironmentLtd's (SHSE:600461) stock increased significantly by 14% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Jiangxi Hongcheng EnvironmentLtd's ROE.
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 Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Jiangxi Hongcheng EnvironmentLtd is:
12% = CN¥1.3b ÷ CN¥10b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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 Jiangxi Hongcheng EnvironmentLtd's Earnings Growth And 12% ROE
To start with, Jiangxi Hongcheng EnvironmentLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.7%. This probably laid the ground for Jiangxi Hongcheng EnvironmentLtd's moderate 16% net income growth seen over the past five years.
As a next step, we compared Jiangxi Hongcheng EnvironmentLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.3%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is 600461 worth today? The intrinsic value infographic in our free research report helps visualize whether 600461 is currently mispriced by the market.
Is Jiangxi Hongcheng EnvironmentLtd Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 48% (implying that the company retains 52% of its profits), it seems that Jiangxi Hongcheng EnvironmentLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Additionally, Jiangxi Hongcheng EnvironmentLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
On the whole, we feel that Jiangxi Hongcheng EnvironmentLtd's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
