Are Strong Financial Prospects The Force That Is Driving The Momentum In Wuhan Tianyuan Environmental Protection Co.,LTD's SZSE:301127) Stock?

Most readers would already be aware that Wuhan Tianyuan Environmental ProtectionLTD's (SZSE:301127) stock increased significantly by 73% over the past 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 Wuhan Tianyuan Environmental ProtectionLTD's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Wuhan Tianyuan Environmental ProtectionLTD

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 Wuhan Tianyuan Environmental ProtectionLTD is:

11% = CN¥297m ÷ CN¥2.8b (Based on the trailing twelve months to September 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¥0.11 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. 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 Wuhan Tianyuan Environmental ProtectionLTD's Earnings Growth And 11% ROE

On the face of it, Wuhan Tianyuan Environmental ProtectionLTD's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.1% which we definitely can't overlook. Particularly, the substantial 24% net income growth seen by Wuhan Tianyuan Environmental ProtectionLTD over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Wuhan Tianyuan Environmental ProtectionLTD's growth is quite high when compared to the industry average growth of 1.6% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Wuhan Tianyuan Environmental ProtectionLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wuhan Tianyuan Environmental ProtectionLTD Using Its Retained Earnings Effectively?

Wuhan Tianyuan Environmental ProtectionLTD's ' three-year median payout ratio is on the lower side at 10% implying that it is retaining a higher percentage (90%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Wuhan Tianyuan Environmental ProtectionLTD has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Wuhan Tianyuan Environmental ProtectionLTD's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Wuhan Tianyuan Environmental ProtectionLTD 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.