Shaanxi Energy Investment Co., Ltd.'s (SZSE:001286) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Shaanxi Energy Investment (SZSE:001286) has had a great run on the share market with its stock up by a significant 8.1% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Shaanxi Energy Investment's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Shaanxi Energy Investment

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 Shaanxi Energy Investment is:

16% = CN¥4.3b ÷ CN¥28b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 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.

Shaanxi Energy Investment's Earnings Growth And 16% ROE

To begin with, Shaanxi Energy Investment seems to have a respectable ROE. Especially when compared to the industry average of 7.1% the company's ROE looks pretty impressive. This certainly adds some context to Shaanxi Energy Investment's exceptional 36% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Shaanxi Energy Investment's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Shaanxi Energy Investment's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shaanxi Energy Investment Making Efficient Use Of Its Profits?

Shaanxi Energy Investment has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Shaanxi Energy Investment is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Along with seeing a growth in earnings, Shaanxi Energy Investment only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 59% over the next three years.

Conclusion

On the whole, we feel that Shaanxi Energy Investment's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Shaanxi Energy Investment by visiting our risks dashboard for free on our platform here.

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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.