Could The Market Be Wrong About Pingdingshan Tianan Coal. Mining Co., Ltd. (SHSE:601666) Given Its Attractive Financial Prospects?

Pingdingshan Tianan Coal. Mining (SHSE:601666) has had a rough three months with its share price down 23%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Pingdingshan Tianan Coal. Mining'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Pingdingshan Tianan Coal. Mining

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Pingdingshan Tianan Coal. Mining is:

12% = CN¥3.8b ÷ CN¥31b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Pingdingshan Tianan Coal. Mining's Earnings Growth And 12% ROE

To start with, Pingdingshan Tianan Coal. Mining's ROE looks acceptable. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This certainly adds some context to Pingdingshan Tianan Coal. Mining's exceptional 33% net income growth seen over the past five years. However, there could also be other causes behind this 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 Pingdingshan Tianan Coal. Mining'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 21%.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 601666 worth today? The intrinsic value infographic in our free research report helps visualize whether 601666 is currently mispriced by the market.

Is Pingdingshan Tianan Coal. Mining Efficiently Re-investing Its Profits?

Pingdingshan Tianan Coal. Mining's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Pingdingshan Tianan Coal. Mining is reinvesting its earnings efficiently.

Moreover, Pingdingshan Tianan Coal. Mining 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 49%. Accordingly, forecasts suggest that Pingdingshan Tianan Coal. Mining's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Pingdingshan Tianan Coal. Mining's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in 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 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.

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