Inner Mongolia MengDian HuaNeng Thermal Power Corporation Limited (SHSE:600863) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Inner Mongolia MengDian HuaNeng Thermal Power (SHSE:600863) has had a rough month with its share price down 8.6%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. 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 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 Inner Mongolia MengDian HuaNeng Thermal Power

How Do You Calculate Return On Equity?

The formula for ROE is:

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:

8.2% = CN¥2.0b ÷ CN¥24b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.

Why Is ROE Important For 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. 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.

Inner Mongolia MengDian HuaNeng Thermal Power's Earnings Growth And 8.2% ROE

On the face of it, Inner Mongolia MengDian HuaNeng Thermal Power's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.7%. Having said that, Inner Mongolia MengDian HuaNeng Thermal Power has shown a modest net income growth of 17% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Inner Mongolia MengDian HuaNeng Thermal Power'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 9.3%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is 600863 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

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

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Inner Mongolia MengDian HuaNeng Thermal Power suggests that the company's growth wasn't really hampered despite it returning most of its income 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.

Summary

On the whole, we do feel that Inner Mongolia MengDian HuaNeng Thermal Power has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com