Mudanjiang Hengfeng Paper Co.,Ltd's (SHSE:600356) Stock Is Going Strong: Have Financials A Role To Play?

Mudanjiang Hengfeng PaperLtd's (SHSE:600356) stock is up by a considerable 47% 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. In this article, we decided to focus on Mudanjiang Hengfeng PaperLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Mudanjiang Hengfeng PaperLtd

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 Mudanjiang Hengfeng PaperLtd is:

6.6% = CN¥173m ÷ CN¥2.6b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With 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. 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 Mudanjiang Hengfeng PaperLtd's Earnings Growth And 6.6% ROE

When you first look at it, Mudanjiang Hengfeng PaperLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.9%, we may spare it some thought. Even so, Mudanjiang Hengfeng PaperLtd has shown a fairly decent growth in its net income which grew at a rate of 5.3%. 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. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Mudanjiang Hengfeng PaperLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.6% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Mudanjiang Hengfeng PaperLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mudanjiang Hengfeng PaperLtd Using Its Retained Earnings Effectively?

Mudanjiang Hengfeng PaperLtd has a three-year median payout ratio of 29%, which implies that it retains the remaining 71% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Mudanjiang Hengfeng PaperLtd 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 Mudanjiang Hengfeng PaperLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Mudanjiang Hengfeng PaperLtd.

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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.