Can Mixed Fundamentals Have A Negative Impact on Bingshan Refrigeration & Heat Transfer Technologies Co., Ltd. (SZSE:000530) Current Share Price Momentum?

Most readers would already be aware that Bingshan Refrigeration & Heat Transfer Technologies' (SZSE:000530) stock increased significantly by 20% over the past week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Bingshan Refrigeration & Heat Transfer Technologies' ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Bingshan Refrigeration & Heat Transfer Technologies

How Do You 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 Bingshan Refrigeration & Heat Transfer Technologies is:

2.3% = CN¥74m ÷ CN¥3.2b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax 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¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Bingshan Refrigeration & Heat Transfer Technologies' Earnings Growth And 2.3% ROE

It is quite clear that Bingshan Refrigeration & Heat Transfer Technologies' ROE is rather low. Even when compared to the industry average of 7.0%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 8.7% seen by Bingshan Refrigeration & Heat Transfer Technologies was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Bingshan Refrigeration & Heat Transfer Technologies' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.8% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Bingshan Refrigeration & Heat Transfer Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bingshan Refrigeration & Heat Transfer Technologies Making Efficient Use Of Its Profits?

Bingshan Refrigeration & Heat Transfer Technologies' low three-year median payout ratio of 17% (or a retention ratio of 83%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Bingshan Refrigeration & Heat Transfer Technologies has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we have mixed feelings about Bingshan Refrigeration & Heat Transfer Technologies. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.