Most readers would already be aware that Xinyi Solar Holdings’ (HKG:968) stock increased significantly by 42% over the past three months. 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. In this article, we decided to focus on Xinyi Solar Holdings’ 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Is ROE Calculated?
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 Xinyi Solar Holdings is:
17% = HK$3.3b ÷ HK$19b (Based on the trailing twelve months to June 2020).
The ‘return’ is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder’s investments, the company generates a profit of HK$0.17.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Xinyi Solar Holdings’ Earnings Growth And 17% ROE
At first glance, Xinyi Solar Holdings seems to have a decent ROE. Especially when compared to the industry average of 7.4% the company’s ROE looks pretty impressive. Probably as a result of this, Xinyi Solar Holdings was able to see a decent growth of 12% over the last five years.
As a next step, we compared Xinyi Solar Holdings’ 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 8.6%.
Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for 968? You can find out in our latest intrinsic value infographic research report.
Is Xinyi Solar Holdings Efficiently Re-investing Its Profits?
Xinyi Solar Holdings has a healthy combination of a moderate three-year median payout ratio of 47% (or a retention ratio of 53%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Besides, Xinyi Solar Holdings has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. Still, forecasts suggest that Xinyi Solar Holdings’ future ROE will rise to 24% even though the the company’s payout ratio is not expected to change by much.
In total, we are pretty happy with Xinyi Solar Holdings’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 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. 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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