Will Weakness in Luyang Energy-Saving Materials Co., Ltd.'s (SZSE:002088) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Luyang Energy-Saving Materials' (SZSE:002088) recent performance, when its stock has declined 8.4% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Luyang Energy-Saving Materials' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Luyang Energy-Saving Materials

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 Luyang Energy-Saving Materials is:

17% = CN¥470m ÷ CN¥2.8b (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¥0.17 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 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.

Luyang Energy-Saving Materials' Earnings Growth And 17% ROE

At first glance, Luyang Energy-Saving Materials seems to have a decent ROE. Especially when compared to the industry average of 6.2% the company's ROE looks pretty impressive. This probably laid the ground for Luyang Energy-Saving Materials' moderate 8.9% net income growth seen over the past five years.

We then compared Luyang Energy-Saving Materials' 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 4.9% 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Luyang Energy-Saving Materials fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Luyang Energy-Saving Materials Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Luyang Energy-Saving Materials suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Luyang Energy-Saving Materials has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Luyang Energy-Saving Materials' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.