Xi'an Shaangu Power Co., Ltd.'s (SHSE:601369) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Xi'an Shaangu Power (SHSE:601369) has had a great run on the share market with its stock up by a significant 20% over the last 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 Xi'an Shaangu 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Xi'an Shaangu Power

How To 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 Xi'an Shaangu Power is:

12% = CN¥1.1b ÷ CN¥9.2b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Has ROE Got To Do With 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.

A Side By Side comparison of Xi'an Shaangu Power's Earnings Growth And 12% ROE

To start with, Xi'an Shaangu Power's ROE looks acceptable. Especially when compared to the industry average of 6.4% the company's ROE looks pretty impressive. This certainly adds some context to Xi'an Shaangu Power's decent 11% net income growth seen over the past five years.

As a next step, we compared Xi'an Shaangu Power's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 10% in the same 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 Xi'an Shaangu Power's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Xi'an Shaangu Power Making Efficient Use Of Its Profits?

Xi'an Shaangu Power has a significant three-year median payout ratio of 62%, meaning that it is left with only 38% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Xi'an Shaangu 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 59%. Accordingly, forecasts suggest that Xi'an Shaangu Power's future ROE will be 13% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Xi'an Shaangu Power's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.