Tibet Huayu Mining Co., Ltd. (SHSE:601020) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Tibet Huayu Mining (SHSE:601020) has had a great run on the share market with its stock up by a significant 15% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Tibet Huayu Mining'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tibet Huayu Mining

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tibet Huayu Mining is:

3.9% = CN¥152m ÷ CN¥3.9b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.04 in profit.

What Has ROE Got To Do With 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 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 Tibet Huayu Mining's Earnings Growth And 3.9% ROE

It is quite clear that Tibet Huayu Mining's ROE is rather low. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. Hence, the flat earnings seen by Tibet Huayu Mining over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Tibet Huayu Mining's reported growth was lower than the industry growth of 9.8% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Tibet Huayu Mining fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tibet Huayu Mining Making Efficient Use Of Its Profits?

Tibet Huayu Mining's low three-year median payout ratio of 24% (implying that the company keeps76% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Moreover, Tibet Huayu Mining has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Tibet Huayu Mining. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Tibet Huayu Mining's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.