Guizhou Panjiang Refined Coal Co.,Ltd. (SHSE:600395) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Guizhou Panjiang Refined CoalLtd (SHSE:600395) has had a great run on the share market with its stock up by a significant 7.2% over the last week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Guizhou Panjiang Refined CoalLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Guizhou Panjiang Refined CoalLtd

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 Guizhou Panjiang Refined CoalLtd is:

3.5% = CN¥438m ÷ CN¥13b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 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. 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 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.

Guizhou Panjiang Refined CoalLtd's Earnings Growth And 3.5% ROE

It is hard to argue that Guizhou Panjiang Refined CoalLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 9.8%, the company's ROE is entirely unremarkable. Although, we can see that Guizhou Panjiang Refined CoalLtd saw a modest net income growth of 6.8% over the past five years. We reckon that there could be other factors at play here. 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 with the industry net income growth, we found that Guizhou Panjiang Refined CoalLtd's reported growth was lower than the industry growth of 22% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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 Guizhou Panjiang Refined CoalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guizhou Panjiang Refined CoalLtd Using Its Retained Earnings Effectively?

Guizhou Panjiang Refined CoalLtd has a significant three-year median payout ratio of 56%, meaning that it is left with only 44% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Guizhou Panjiang Refined CoalLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we're a bit ambivalent about Guizhou Panjiang Refined CoalLtd's performance. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.