Yongtaiyun Chemical Logistics Co.,Ltd's (SZSE:001228) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Yongtaiyun Chemical LogisticsLtd's (SZSE:001228) recent performance, when its stock has declined 10% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Yongtaiyun Chemical LogisticsLtd's ROE today.

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.

See our latest analysis for Yongtaiyun Chemical LogisticsLtd

How Is ROE Calculated?

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 Yongtaiyun Chemical LogisticsLtd is:

7.9% = CN¥149m ÷ CN¥1.9b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 in profit.

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 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.

Yongtaiyun Chemical LogisticsLtd's Earnings Growth And 7.9% ROE

When you first look at it, Yongtaiyun Chemical LogisticsLtd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.9%. Looking at Yongtaiyun Chemical LogisticsLtd's exceptional 23% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Yongtaiyun Chemical LogisticsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Yongtaiyun Chemical LogisticsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yongtaiyun Chemical LogisticsLtd Using Its Retained Earnings Effectively?

Yongtaiyun Chemical LogisticsLtd's ' three-year median payout ratio is on the lower side at 18% implying that it is retaining a higher percentage (82%) of its profits. So it looks like Yongtaiyun Chemical LogisticsLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, Yongtaiyun Chemical LogisticsLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we feel that Yongtaiyun Chemical LogisticsLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.