Do Its Financials Have Any Role To Play In Driving Shanxi Lu'an Environmental Energy Development Co., Ltd.'s (SHSE:601699) Stock Up Recently?

Shanxi Lu'an Environmental Energy Development's (SHSE:601699) stock is up by a considerable 12% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Shanxi Lu'an Environmental Energy Development's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Shanxi Lu'an Environmental Energy Development

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 Shanxi Lu'an Environmental Energy Development is:

9.3% = CN¥4.6b ÷ CN¥49b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

What Is The Relationship Between ROE And 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 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.

Shanxi Lu'an Environmental Energy Development's Earnings Growth And 9.3% ROE

At first glance, Shanxi Lu'an Environmental Energy Development's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.3%, so we won't completely dismiss the company. Looking at Shanxi Lu'an Environmental Energy Development's exceptional 25% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Shanxi Lu'an Environmental Energy Development's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Shanxi Lu'an Environmental Energy Development fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanxi Lu'an Environmental Energy Development Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 60% (implying that it keeps only 40% of profits) for Shanxi Lu'an Environmental Energy Development suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Shanxi Lu'an Environmental Energy Development has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Shanxi Lu'an Environmental Energy Development has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.