Are Inner Mongolia MengDian HuaNeng Thermal Power Corporation Limited's (SHSE:600863) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 12% over the past three months, it is easy to disregard Inner Mongolia MengDian HuaNeng Thermal Power (SHSE:600863). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Inner Mongolia MengDian HuaNeng Thermal Power's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Inner Mongolia MengDian HuaNeng Thermal Power

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 Inner Mongolia MengDian HuaNeng Thermal Power is:

9.0% = CN¥2.2b ÷ CN¥25b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Inner Mongolia MengDian HuaNeng Thermal Power's Earnings Growth And 9.0% ROE

On the face of it, Inner Mongolia MengDian HuaNeng Thermal Power's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. Looking at Inner Mongolia MengDian HuaNeng Thermal Power's exceptional 22% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some 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 Inner Mongolia MengDian HuaNeng Thermal Power'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 10% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Inner Mongolia MengDian HuaNeng Thermal Power fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Inner Mongolia MengDian HuaNeng Thermal Power Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 56% (implying that it keeps only 44% of profits) for Inner Mongolia MengDian HuaNeng Thermal Power suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Inner Mongolia MengDian HuaNeng Thermal Power has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. Still, forecasts suggest that Inner Mongolia MengDian HuaNeng Thermal Power'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 feel that Inner Mongolia MengDian HuaNeng Thermal Power certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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. 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.