Xinjiang Winka Times Department Store Co.,Ltd.'s (SHSE:603101) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Xinjiang Winka Times Department StoreLtd's (SHSE:603101) stock is up by a considerable 19% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Xinjiang Winka Times Department StoreLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Xinjiang Winka Times Department StoreLtd

How Is ROE Calculated?

Return on equity 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 Xinjiang Winka Times Department StoreLtd is:

5.2% = CN¥77m ÷ CN¥1.5b (Based on the trailing twelve months to June 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¥0.05 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. 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. 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.

Xinjiang Winka Times Department StoreLtd's Earnings Growth And 5.2% ROE

When you first look at it, Xinjiang Winka Times Department StoreLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 4.0% doesn't go unnoticed by us. Still, Xinjiang Winka Times Department StoreLtd has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

When you consider the fact that the industry earnings have shrunk at a rate of 12% in the same 5-year period, the company's net income growth is pretty remarkable.

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. 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 Xinjiang Winka Times Department StoreLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Xinjiang Winka Times Department StoreLtd Using Its Retained Earnings Effectively?

Xinjiang Winka Times Department StoreLtd has a very high three-year median payout ratio of 110% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence of growth in Xinjiang Winka Times Department StoreLtd's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. That's a huge risk in our books. Our risks dashboard should have the 3 risks we have identified for Xinjiang Winka Times Department StoreLtd.

In addition, Xinjiang Winka Times Department StoreLtd 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.

Summary

On the whole, we do feel that Xinjiang Winka Times Department StoreLtd has some positive attributes. Especially the growth in earnings which was backed by a moderate ROE. Still, the ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Xinjiang Winka Times Department StoreLtd and see how it has performed in the past by looking at this FREE detailed graph 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.