Is Guizhou Chanhen Chemical Corporation's (SZSE:002895) Latest Stock Performance A Reflection Of Its Financial Health?

Guizhou Chanhen Chemical's (SZSE:002895) stock is up by a considerable 27% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Guizhou Chanhen Chemical's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Guizhou Chanhen Chemical

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 Guizhou Chanhen Chemical is:

14% = CN¥952m ÷ CN¥7.0b (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¥0.14.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Guizhou Chanhen Chemical's Earnings Growth And 14% ROE

At first glance, Guizhou Chanhen Chemical seems to have a decent ROE. On comparing with the average industry ROE of 6.2% the company's ROE looks pretty remarkable. This probably laid the ground for Guizhou Chanhen Chemical's significant 37% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Guizhou Chanhen Chemical'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 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 002895 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Guizhou Chanhen Chemical Efficiently Re-investing Its Profits?

Guizhou Chanhen Chemical's three-year median payout ratio is a pretty moderate 49%, meaning the company retains 51% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Guizhou Chanhen Chemical is reinvesting its earnings efficiently.

Besides, Guizhou Chanhen Chemical has been paying dividends over a period of seven years. 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 over the next three years is expected to be approximately 53%. However, Guizhou Chanhen Chemical's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Guizhou Chanhen Chemical's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.