Is Xinjiang Hongtong Natural Gas Co., Ltd.'s (SHSE:605169) Stock On A Downtrend As A Result Of Its Poor Financials?

Xinjiang Hongtong Natural Gas (SHSE:605169) has had a rough week with its share price down 12%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Xinjiang Hongtong Natural Gas' ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Xinjiang Hongtong Natural Gas

How To Calculate Return On Equity?

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 Xinjiang Hongtong Natural Gas is:

8.3% = CN¥155m ÷ CN¥1.9b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

Why Is ROE Important For 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.

Xinjiang Hongtong Natural Gas' Earnings Growth And 8.3% ROE

On the face of it, Xinjiang Hongtong Natural Gas' ROE is not much to talk about. However, its ROE is similar to the industry average of 9.8%, so we won't completely dismiss the company. Still, Xinjiang Hongtong Natural Gas has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 21% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Xinjiang Hongtong Natural Gas fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xinjiang Hongtong Natural Gas Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (meaning, the company retains only 48% of profits) for Xinjiang Hongtong Natural Gas suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Xinjiang Hongtong Natural Gas has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Xinjiang Hongtong Natural Gas. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Xinjiang Hongtong Natural Gas' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.