Could The Market Be Wrong About Qingdao Daneng Environmental Protection Equipment Co., Ltd. (SHSE:688501) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Qingdao Daneng Environmental Protection Equipment's (SHSE:688501) recent performance, when its stock has declined 32% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Qingdao Daneng Environmental Protection Equipment's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Qingdao Daneng Environmental Protection Equipment

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 Qingdao Daneng Environmental Protection Equipment is:

11% = CN¥97m ÷ CN¥916m (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Qingdao Daneng Environmental Protection Equipment's Earnings Growth And 11% ROE

When you first look at it, Qingdao Daneng Environmental Protection Equipment's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.8%, is definitely interesting. This certainly adds some context to Qingdao Daneng Environmental Protection Equipment's moderate 15% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Qingdao Daneng Environmental Protection Equipment's growth is quite high when compared to the industry average growth of 9.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Qingdao Daneng Environmental Protection Equipment is trading on a high P/E or a low P/E, relative to its industry.

Is Qingdao Daneng Environmental Protection Equipment Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Qingdao Daneng Environmental Protection Equipment is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While Qingdao Daneng Environmental Protection Equipment has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we are quite pleased with Qingdao Daneng Environmental Protection Equipment's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com