Shaanxi Coal Industry Company Limited's (SHSE:601225) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Shaanxi Coal Industry (SHSE:601225) has had a rough three months with its share price down 6.9%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Shaanxi Coal Industry'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shaanxi Coal Industry

How To Calculate Return On Equity?

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 Shaanxi Coal Industry is:

25% = CN¥35b ÷ CN¥138b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.25.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Shaanxi Coal Industry's Earnings Growth And 25% ROE

Firstly, we acknowledge that Shaanxi Coal Industry has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.3% which is quite remarkable. This probably laid the groundwork for Shaanxi Coal Industry's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Shaanxi Coal Industry'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 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shaanxi Coal Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shaanxi Coal Industry Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 60% (or a retention ratio of 40%) for Shaanxi Coal Industry suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Shaanxi Coal Industry 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. However, Shaanxi Coal Industry's future ROE is expected to decline to 20% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we feel that Shaanxi Coal Industry certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. 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.