China National Gold Group Gold Jewellery Co.,Ltd.'s (SHSE:600916) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 3.6% over the past month, it is easy to disregard China National Gold Group Gold JewelleryLtd (SHSE:600916). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on China National Gold Group Gold JewelleryLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for China National Gold Group Gold JewelleryLtd

How Is ROE Calculated?

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 China National Gold Group Gold JewelleryLtd is:

13% = CN¥984m ÷ CN¥7.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

China National Gold Group Gold JewelleryLtd's Earnings Growth And 13% ROE

To begin with, China National Gold Group Gold JewelleryLtd seems to have a respectable ROE. Especially when compared to the industry average of 7.1% the company's ROE looks pretty impressive. This certainly adds some context to China National Gold Group Gold JewelleryLtd's decent 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that China National Gold Group Gold JewelleryLtd's growth is quite high when compared to the industry average growth of 2.8% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is China National Gold Group Gold JewelleryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China National Gold Group Gold JewelleryLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 58% (or a retention ratio of 42%) for China National Gold Group Gold JewelleryLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, China National Gold Group Gold JewelleryLtd has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 83% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we are pretty happy with China National Gold Group Gold JewelleryLtd's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.