Will Weakness in Yankuang Energy Group Company Limited's (HKG:1171) Stock Prove Temporary Given Strong Fundamentals?

Yankuang Energy Group (HKG:1171) has had a rough month with its share price down 7.9%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Yankuang Energy Group's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Yankuang Energy Group

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 Yankuang Energy Group is:

17% = CN¥22b ÷ CN¥130b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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$0.17.

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. 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. 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.

Yankuang Energy Group's Earnings Growth And 17% ROE

To begin with, Yankuang Energy Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.9%. This certainly adds some context to Yankuang Energy Group's decent 19% net income growth seen over the past five years.

We then performed a comparison between Yankuang Energy Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same 5-year period.

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 1171 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Yankuang Energy Group Efficiently Re-investing Its Profits?

Yankuang Energy Group has a healthy combination of a moderate three-year median payout ratio of 46% (or a retention ratio of 54%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Yankuang Energy Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 64% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 13%) over the same period.

Conclusion

Overall, we are quite pleased with Yankuang Energy Group's 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.