Are Robust Financials Driving The Recent Rally In Henan Shenhuo Coal Industary and Electricity Power Corporation Limited's (SZSE:000933) Stock?

Henan Shenhuo Coal Industary and Electricity Power (SZSE:000933) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Henan Shenhuo Coal Industary and Electricity Power's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Henan Shenhuo Coal Industary and Electricity Power

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 Henan Shenhuo Coal Industary and Electricity Power is:

25% = CN¥6.2b ÷ CN¥25b (Based on the trailing twelve months to March 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¥0.25 in profit.

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. 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. 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 Henan Shenhuo Coal Industary and Electricity Power's Earnings Growth And 25% ROE

First thing first, we like that Henan Shenhuo Coal Industary and Electricity Power has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.4% which is quite remarkable. So, the substantial 44% net income growth seen by Henan Shenhuo Coal Industary and Electricity Power over the past five years isn't overly surprising.

We then compared Henan Shenhuo Coal Industary and Electricity Power'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 12% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Henan Shenhuo Coal Industary and Electricity Power fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Henan Shenhuo Coal Industary and Electricity Power Using Its Retained Earnings Effectively?

Henan Shenhuo Coal Industary and Electricity Power has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Henan Shenhuo Coal Industary and Electricity Power is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Henan Shenhuo Coal Industary and Electricity Power has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 36% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Henan Shenhuo Coal Industary and Electricity Power's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 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.