Is CECEP Environmental Protection Co., Ltd.'s (SZSE:300140) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

CECEP Environmental Protection (SZSE:300140) has had a great run on the share market with its stock up by a significant 34% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on CECEP Environmental Protection's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for CECEP Environmental Protection

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 CECEP Environmental Protection is:

5.0% = CN¥705m ÷ CN¥14b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 CECEP Environmental Protection's Earnings Growth And 5.0% ROE

When you first look at it, CECEP Environmental Protection's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 7.0%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that CECEP Environmental Protection grew its net income at a significant rate of 52% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared CECEP Environmental Protection's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.7% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about CECEP Environmental Protection's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CECEP Environmental Protection Making Efficient Use Of Its Profits?

CECEP Environmental Protection's three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. So it seems that CECEP Environmental Protection is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, CECEP Environmental Protection 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.

Conclusion

On the whole, we do feel that CECEP Environmental Protection has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for CECEP Environmental Protection visit our risks dashboard for free.

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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.