Are Robust Financials Driving The Recent Rally In Qingdao Yunlu Advanced Materials Technology Co., Ltd.'s (SHSE:688190) Stock?

Qingdao Yunlu Advanced Materials Technology's (SHSE:688190) stock is up by a considerable 31% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Qingdao Yunlu Advanced Materials Technology's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Qingdao Yunlu Advanced Materials Technology

How Do You Calculate Return On Equity?

ROE 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 Qingdao Yunlu Advanced Materials Technology is:

15% = CN¥357m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.15 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Qingdao Yunlu Advanced Materials Technology's Earnings Growth And 15% ROE

To begin with, Qingdao Yunlu Advanced Materials Technology seems to have a respectable ROE. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. This probably laid the ground for Qingdao Yunlu Advanced Materials Technology's significant 38% 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.

As a next step, we compared Qingdao Yunlu Advanced Materials Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.8%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Qingdao Yunlu Advanced Materials Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Qingdao Yunlu Advanced Materials Technology Using Its Retained Earnings Effectively?

Qingdao Yunlu Advanced Materials Technology's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. By the looks of it, the dividend is well covered and Qingdao Yunlu Advanced Materials Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Qingdao Yunlu Advanced Materials Technology is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

Overall, we are quite pleased with Qingdao Yunlu Advanced Materials Technology'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.