Is Inner Mongolia ERDOS Resources Co.,Ltd.'s (SHSE:600295) Latest Stock Performance A Reflection Of Its Financial Health?

Inner Mongolia ERDOS ResourcesLtd's (SHSE:600295) stock is up by a considerable 15% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Inner Mongolia ERDOS ResourcesLtd's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Inner Mongolia ERDOS ResourcesLtd

How Do You 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 Inner Mongolia ERDOS ResourcesLtd is:

15% = CN¥3.8b ÷ CN¥26b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 in profit.

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.

A Side By Side comparison of Inner Mongolia ERDOS ResourcesLtd's Earnings Growth And 15% ROE

To begin with, Inner Mongolia ERDOS ResourcesLtd seems to have a respectable ROE. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. This certainly adds some context to Inner Mongolia ERDOS ResourcesLtd's exceptional 35% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

Next, on comparing with the industry net income growth, we found that Inner Mongolia ERDOS ResourcesLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Inner Mongolia ERDOS ResourcesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Inner Mongolia ERDOS ResourcesLtd Efficiently Re-investing Its Profits?

Inner Mongolia ERDOS ResourcesLtd's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. So it seems that Inner Mongolia ERDOS ResourcesLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Inner Mongolia ERDOS ResourcesLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Inner Mongolia ERDOS ResourcesLtd'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Inner Mongolia ERDOS ResourcesLtd.

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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.