HeBei Jinniu Chemical Industry Co.,Ltd's (SHSE:600722) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

HeBei Jinniu Chemical IndustryLtd (SHSE:600722) has had a rough week with its share price down 13%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study HeBei Jinniu Chemical IndustryLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

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 HeBei Jinniu Chemical IndustryLtd is:

6.3% = CN¥86m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.06 in profit.

View our latest analysis for HeBei Jinniu Chemical IndustryLtd

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

HeBei Jinniu Chemical IndustryLtd's Earnings Growth And 6.3% ROE

On the face of it, HeBei Jinniu Chemical IndustryLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.2%, we may spare it some thought. On the other hand, HeBei Jinniu Chemical IndustryLtd reported a moderate 11% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. 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 HeBei Jinniu Chemical IndustryLtd's growth is quite high when compared to the industry average growth of 4.2% in the same period, which is great to see.

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. 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 HeBei Jinniu Chemical IndustryLtd is trading on a high P/E or a low P/E, relative to its industry.

Is HeBei Jinniu Chemical IndustryLtd Making Efficient Use Of Its Profits?

Given that HeBei Jinniu Chemical IndustryLtd doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like HeBei Jinniu Chemical IndustryLtd 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.

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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.