Fujian Haixia Environmental Protection Group Co.,Ltd.'s (SHSE:603817) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 14% over the past month, it is easy to disregard Fujian Haixia Environmental Protection GroupLtd (SHSE:603817). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Fujian Haixia Environmental Protection GroupLtd's ROE.

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.

See our latest analysis for Fujian Haixia Environmental Protection GroupLtd

How To Calculate Return On Equity?

ROE 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 Fujian Haixia Environmental Protection GroupLtd is:

5.0% = CN¥144m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. 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.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Fujian Haixia Environmental Protection GroupLtd's Earnings Growth And 5.0% ROE

When you first look at it, Fujian Haixia Environmental Protection GroupLtd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 5.2%, so we won't completely dismiss the company. Even so, Fujian Haixia Environmental Protection GroupLtd has shown a fairly decent growth in its net income which grew at a rate of 5.2%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Fujian Haixia Environmental Protection GroupLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.7% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Fujian Haixia Environmental Protection GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Fujian Haixia Environmental Protection GroupLtd Efficiently Re-investing Its Profits?

Fujian Haixia Environmental Protection GroupLtd's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Fujian Haixia Environmental Protection GroupLtd has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Fujian Haixia Environmental Protection GroupLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 2 risks we have identified for Fujian Haixia Environmental Protection GroupLtd 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.