Is Shandong Hualu-Hengsheng Chemical Co., Ltd.'s (SHSE:600426) Latest Stock Performance A Reflection Of Its Financial Health?

Shandong Hualu-Hengsheng Chemical (SHSE:600426) has had a great run on the share market with its stock up by a significant 5.3% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Shandong Hualu-Hengsheng Chemical's ROE in this article.

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.

Check out our latest analysis for Shandong Hualu-Hengsheng Chemical

How Is ROE Calculated?

Return on equity 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 Shandong Hualu-Hengsheng Chemical is:

12% = CN¥4.0b ÷ CN¥33b (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¥0.12 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. 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. 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.

A Side By Side comparison of Shandong Hualu-Hengsheng Chemical's Earnings Growth And 12% ROE

To begin with, Shandong Hualu-Hengsheng Chemical seems to have a respectable ROE. Especially when compared to the industry average of 6.2% the company's ROE looks pretty impressive. This certainly adds some context to Shandong Hualu-Hengsheng Chemical's decent 10% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Shandong Hualu-Hengsheng Chemical's growth is quite high when compared to the industry average growth of 4.7% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shandong Hualu-Hengsheng Chemical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shandong Hualu-Hengsheng Chemical Using Its Retained Earnings Effectively?

Shandong Hualu-Hengsheng Chemical has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Shandong Hualu-Hengsheng Chemical 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. Accordingly, forecasts suggest that Shandong Hualu-Hengsheng Chemical's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Shandong Hualu-Hengsheng Chemical's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.