Declining Stock and Decent Financials: Is The Market Wrong About Hunan Yuneng New Energy Battery Material Co.,Ltd. (SZSE:301358)?

Hunan Yuneng New Energy Battery MaterialLtd (SZSE:301358) has had a rough month with its share price down 10%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Hunan Yuneng New Energy Battery MaterialLtd's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Hunan Yuneng New Energy Battery MaterialLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hunan Yuneng New Energy Battery MaterialLtd is:

4.6% = CN¥528m ÷ CN¥12b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Has ROE Got To Do With 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.

Hunan Yuneng New Energy Battery MaterialLtd's Earnings Growth And 4.6% ROE

It is quite clear that Hunan Yuneng New Energy Battery MaterialLtd's ROE is rather low. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. Although, we can see that Hunan Yuneng New Energy Battery MaterialLtd saw a modest net income growth of 12% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Hunan Yuneng New Energy Battery MaterialLtd'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 10% in the same 5-year period.

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). 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 Hunan Yuneng New Energy Battery MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hunan Yuneng New Energy Battery MaterialLtd Using Its Retained Earnings Effectively?

Hunan Yuneng New Energy Battery MaterialLtd has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

While Hunan Yuneng New Energy Battery MaterialLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 21% over the next three years. Regardless, the future ROE for Hunan Yuneng New Energy Battery MaterialLtd is speculated to rise to 16% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, it does look like Hunan Yuneng New Energy Battery MaterialLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.