Is Chengtun Mining Group Co., Ltd.'s (SHSE:600711) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Chengtun Mining Group's (SHSE:600711) recent performance, when its stock has declined 21% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Chengtun Mining Group'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.

See our latest analysis for Chengtun Mining Group

How Is ROE Calculated?

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 Chengtun Mining Group is:

8.5% = CN¥1.4b ÷ CN¥17b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Chengtun Mining Group's Earnings Growth And 8.5% ROE

At first glance, Chengtun Mining Group's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.7%, we may spare it some thought. Having said that, Chengtun Mining Group's net income growth over the past five years is more or less flat. 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.

As a next step, we compared Chengtun Mining Group's net income growth with the industry and discovered that the industry saw an average growth of 10% 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 Chengtun Mining Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chengtun Mining Group Efficiently Re-investing Its Profits?

Chengtun Mining Group has a low three-year median payout ratio of 10.0% (or a retention ratio of 90%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Chengtun Mining Group has been paying dividends over a period of at least ten 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

On the whole, we feel that the performance shown by Chengtun Mining Group can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Chengtun Mining Group's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.