Are Strong Financial Prospects The Force That Is Driving The Momentum In Xinjiang Xuefeng Sci-Tech(Group)Co.,Ltd's SHSE:603227) Stock?

Most readers would already be aware that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's (SHSE:603227) stock increased significantly by 8.2% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is:

14% = CN¥811m ÷ CN¥5.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.14 in profit.

View our latest analysis for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Earnings Growth And 14% ROE

At first glance, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd seems to have a decent ROE. On comparing with the average industry ROE of 6.2% the company's ROE looks pretty remarkable. This probably laid the ground for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's significant 40% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.2% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd Making Efficient Use Of Its Profits?

Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's ' three-year median payout ratio is on the lower side at 19% implying that it is retaining a higher percentage (81%) of its profits. So it looks like Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's performance. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.