Do Its Financials Have Any Role To Play In Driving Shaanxi Provincial Natural Gas Co.,Ltd's (SZSE:002267) Stock Up Recently?

Shaanxi Provincial Natural GasLtd's (SZSE:002267) stock is up by a considerable 21% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Shaanxi Provincial Natural GasLtd's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shaanxi Provincial Natural GasLtd

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 Shaanxi Provincial Natural GasLtd is:

8.6% = CN¥634m ÷ CN¥7.4b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Shaanxi Provincial Natural GasLtd's Earnings Growth And 8.6% ROE

At first glance, Shaanxi Provincial Natural GasLtd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.5%. Having said that, Shaanxi Provincial Natural GasLtd has shown a modest net income growth of 9.7% 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 example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Shaanxi Provincial Natural GasLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.4% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Shaanxi Provincial Natural GasLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shaanxi Provincial Natural GasLtd Using Its Retained Earnings Effectively?

Shaanxi Provincial Natural GasLtd has a significant three-year median payout ratio of 70%, meaning that it is left with only 30% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Shaanxi Provincial Natural GasLtd 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

In total, it does look like Shaanxi Provincial Natural GasLtd has some positive aspects to its business. 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. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Shaanxi Provincial Natural GasLtd 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.

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