Is Weakness In Jinneng Holding Shanxi Coal Industry Co.,ltd. (SHSE:601001) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Jinneng Holding Shanxi Coal Industryltd's (SHSE:601001) recent performance, when its stock has declined 18% over the past three months. 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. Particularly, we will be paying attention to Jinneng Holding Shanxi Coal Industryltd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Jinneng Holding Shanxi Coal Industryltd

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jinneng Holding Shanxi Coal Industryltd is:

17% = CN¥4.4b ÷ CN¥27b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.17 in profit.

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. 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 Jinneng Holding Shanxi Coal Industryltd's Earnings Growth And 17% ROE

To start with, Jinneng Holding Shanxi Coal Industryltd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.3%. This certainly adds some context to Jinneng Holding Shanxi Coal Industryltd's exceptional 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. 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.

As a next step, we compared Jinneng Holding Shanxi Coal Industryltd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 22% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Jinneng Holding Shanxi Coal Industryltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jinneng Holding Shanxi Coal Industryltd Efficiently Re-investing Its Profits?

Jinneng Holding Shanxi Coal Industryltd has a three-year median payout ratio of 38% (where it is retaining 62% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Jinneng Holding Shanxi Coal Industryltd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Jinneng Holding Shanxi Coal Industryltd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

Overall, we are quite pleased with Jinneng Holding Shanxi Coal Industryltd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.