Beijing China Sciences Runyu Environmental Technology Co., Ltd.'s (SZSE:301175) Stock Is Going Strong: Is the Market Following Fundamentals?

Beijing China Sciences Runyu Environmental Technology's (SZSE:301175) stock is up by a considerable 22% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Beijing China Sciences Runyu Environmental Technology'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Beijing China Sciences Runyu Environmental Technology

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 Beijing China Sciences Runyu Environmental Technology is:

9.5% = CN¥366m ÷ CN¥3.8b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

What Is The Relationship Between ROE And 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.

Beijing China Sciences Runyu Environmental Technology's Earnings Growth And 9.5% ROE

On the face of it, Beijing China Sciences Runyu Environmental Technology's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.1%, is definitely interesting. Particularly, the substantial 21% net income growth seen by Beijing China Sciences Runyu Environmental Technology over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Beijing China Sciences Runyu Environmental Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.6%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Beijing China Sciences Runyu Environmental Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Beijing China Sciences Runyu Environmental Technology Efficiently Re-investing Its Profits?

Beijing China Sciences Runyu Environmental Technology's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Beijing China Sciences Runyu Environmental Technology is reinvesting its earnings efficiently.

While Beijing China Sciences Runyu Environmental Technology has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we are quite pleased with Beijing China Sciences Runyu Environmental Technology's performance. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Beijing China Sciences Runyu Environmental Technology 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.