Can Mixed Fundamentals Have A Negative Impact on CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) Current Share Price Momentum?

CNNC Hua Yuan Titanium Dioxide's (SZSE:002145) stock is up by a considerable 40% over the past three months. 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. Specifically, we decided to study CNNC Hua Yuan Titanium Dioxide's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for CNNC Hua Yuan Titanium Dioxide

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 CNNC Hua Yuan Titanium Dioxide is:

4.4% = CN¥531m ÷ CN¥12b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 CNNC Hua Yuan Titanium Dioxide's Earnings Growth And 4.4% ROE

As you can see, CNNC Hua Yuan Titanium Dioxide's ROE looks pretty weak. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. Therefore, CNNC Hua Yuan Titanium Dioxide's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared CNNC Hua Yuan Titanium Dioxide's net income growth with the industry and discovered that the industry saw an average growth of 4.9% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 CNNC Hua Yuan Titanium Dioxide is trading on a high P/E or a low P/E, relative to its industry.

Is CNNC Hua Yuan Titanium Dioxide Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 34% (meaning the company retains66% of profits) in the last three-year period, CNNC Hua Yuan Titanium Dioxide's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, CNNC Hua Yuan Titanium Dioxide has been paying dividends over a period of seven 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

On the whole, we feel that the performance shown by CNNC Hua Yuan Titanium Dioxide can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into CNNC Hua Yuan Titanium Dioxide's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.