Is Weakness In Ye Xing Group Holdings Limited (HKG:1941) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Ye Xing Group Holdings (HKG:1941) has had a rough three months with its share price down 17%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Ye Xing Group Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Ye Xing Group Holdings

How To 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 Ye Xing Group Holdings is:

18% = CN¥43m ÷ CN¥243m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.18.

What Has ROE Got To Do With 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.

Ye Xing Group Holdings' Earnings Growth And 18% ROE

At first glance, Ye Xing Group Holdings seems to have a decent ROE. On comparing with the average industry ROE of 10.0% the company's ROE looks pretty remarkable. This probably laid the ground for Ye Xing Group Holdings' moderate 12% net income growth seen over the past five years.

We then performed a comparison between Ye Xing Group Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same 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. 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 Ye Xing Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ye Xing Group Holdings Making Efficient Use Of Its Profits?

Summary

Overall, we are quite pleased with Ye Xing Group Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 4 risks we have identified for Ye Xing Group Holdings 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. 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.
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