Could The Market Be Wrong About Tianshan Aluminum Group Co.,Ltd (SZSE:002532) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Tianshan Aluminum GroupLtd's (SZSE:002532) recent performance, when its stock has declined 16% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Tianshan Aluminum GroupLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tianshan Aluminum GroupLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tianshan Aluminum GroupLtd is:

9.8% = CN¥2.4b ÷ CN¥25b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Tianshan Aluminum GroupLtd's Earnings Growth And 9.8% ROE

On the face of it, Tianshan Aluminum GroupLtd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 7.4%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 12% seen over the past five years by Tianshan Aluminum GroupLtd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing Tianshan Aluminum GroupLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Tianshan Aluminum GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Tianshan Aluminum GroupLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 45% (implying that the company retains 55% of its profits), it seems that Tianshan Aluminum GroupLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Tianshan Aluminum GroupLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Still, forecasts suggest that Tianshan Aluminum GroupLtd's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Tianshan Aluminum GroupLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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