Fujian Yongfu Power Engineering Co.,Ltd.'s (SZSE:300712) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Fujian Yongfu Power EngineeringLtd's (SZSE:300712) stock is up by a considerable 34% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Fujian Yongfu Power EngineeringLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Fujian Yongfu Power EngineeringLtd

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 Yongfu Power EngineeringLtd is:

2.6% = CN¥35m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

What Is The Relationship Between ROE And 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. 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.

Fujian Yongfu Power EngineeringLtd's Earnings Growth And 2.6% ROE

It is quite clear that Fujian Yongfu Power EngineeringLtd's ROE is rather low. Even compared to the average industry ROE of 6.6%, the company's ROE is quite dismal. Hence, the flat earnings seen by Fujian Yongfu Power EngineeringLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Fujian Yongfu Power EngineeringLtd's reported growth was lower than the industry growth of 3.5% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Yongfu Power EngineeringLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Fujian Yongfu Power EngineeringLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 31% (or a retention ratio of 69%), Fujian Yongfu Power EngineeringLtd hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Fujian Yongfu Power EngineeringLtd has been paying dividends over a period of seven 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 Fujian Yongfu Power EngineeringLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.