Xi'an Manareco New Materials Co.,Ltd's (SHSE:688550) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Xi'an Manareco New MaterialsLtd (SHSE:688550) has had a great run on the share market with its stock up by a significant 17% over the last week. 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. In this article, we decided to focus on Xi'an Manareco New MaterialsLtd'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.

View our latest analysis for Xi'an Manareco New MaterialsLtd

How Do You 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 Xi'an Manareco New MaterialsLtd is:

5.9% = CN¥171m ÷ CN¥2.9b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 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. 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.

Xi'an Manareco New MaterialsLtd's Earnings Growth And 5.9% ROE

On the face of it, Xi'an Manareco New MaterialsLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.4%, so we won't completely dismiss the company. Having said that, Xi'an Manareco New MaterialsLtd's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Xi'an Manareco New MaterialsLtd's reported growth was lower than the industry growth of 6.2% over the last few years, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Xi'an Manareco New MaterialsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xi'an Manareco New MaterialsLtd Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 46% (meaning the company retains54% of profits) in the last three-year period, Xi'an Manareco New MaterialsLtd's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Xi'an Manareco New MaterialsLtd has been paying dividends over a period of four 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

Overall, we have mixed feelings about Xi'an Manareco New MaterialsLtd. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.