Are Strong Financial Prospects The Force That Is Driving The Momentum In Kunshan Kinglai Hygienic Materials Co.,Ltd.'s SZSE:300260) Stock?

Kunshan Kinglai Hygienic MaterialsLtd (SZSE:300260) has had a great run on the share market with its stock up by a significant 52% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Kunshan Kinglai Hygienic MaterialsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kunshan Kinglai Hygienic MaterialsLtd

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kunshan Kinglai Hygienic MaterialsLtd is:

14% = CN¥265m ÷ CN¥1.9b (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¥0.14.

What Is The Relationship Between ROE And 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. 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.

Kunshan Kinglai Hygienic MaterialsLtd's Earnings Growth And 14% ROE

At first glance, Kunshan Kinglai Hygienic MaterialsLtd seems to have a decent ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. This certainly adds some context to Kunshan Kinglai Hygienic MaterialsLtd's exceptional 30% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Kunshan Kinglai Hygienic MaterialsLtd's growth is quite high when compared to the industry average growth of 7.3% in the same period, which is great to see.

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 Kunshan Kinglai Hygienic MaterialsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kunshan Kinglai Hygienic MaterialsLtd Making Efficient Use Of Its Profits?

Kunshan Kinglai Hygienic MaterialsLtd's three-year median payout ratio to shareholders is 9.8%, which is quite low. This implies that the company is retaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Kunshan Kinglai Hygienic MaterialsLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Kunshan Kinglai Hygienic MaterialsLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.