Yunnan Lincang Xinyuan Germanium Industry Co.,LTD's (SZSE:002428) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Yunnan Lincang Xinyuan Germanium IndustryLTD (SZSE:002428) has had a great run on the share market with its stock up by a significant 63% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Yunnan Lincang Xinyuan Germanium IndustryLTD'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Yunnan Lincang Xinyuan Germanium IndustryLTD

How Is ROE Calculated?

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 Yunnan Lincang Xinyuan Germanium IndustryLTD is:

2.6% = CN¥40m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Yunnan Lincang Xinyuan Germanium IndustryLTD's Earnings Growth And 2.6% ROE

As you can see, Yunnan Lincang Xinyuan Germanium IndustryLTD's ROE looks pretty weak. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. Yunnan Lincang Xinyuan Germanium IndustryLTD was still able to see a decent net income growth of 7.3% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Yunnan Lincang Xinyuan Germanium IndustryLTD's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.8% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Yunnan Lincang Xinyuan Germanium IndustryLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yunnan Lincang Xinyuan Germanium IndustryLTD Making Efficient Use Of Its Profits?

Yunnan Lincang Xinyuan Germanium IndustryLTD's high three-year median payout ratio of 240% suggests that the company is paying out more to its shareholders than what it is making. In spite of this, the company was able to grow its earnings respectably, as we saw above. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. To know the 2 risks we have identified for Yunnan Lincang Xinyuan Germanium IndustryLTD visit our risks dashboard for free.

Moreover, Yunnan Lincang Xinyuan Germanium IndustryLTD is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Yunnan Lincang Xinyuan Germanium IndustryLTD. Although the company has shown a fair bit of growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.