Has Zhaojin Mining Industry Company Limited's (HKG:1818) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
January 25, 2022
SEHK:1818
Source: Shutterstock

Most readers would already be aware that Zhaojin Mining Industry's (HKG:1818) stock increased significantly by 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. Specifically, we decided to study Zhaojin Mining Industry'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zhaojin Mining Industry

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 Zhaojin Mining Industry is:

2.0% = CN¥346m ÷ CN¥18b (Based on the trailing twelve months to September 2021).

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$0.02.

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 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.

A Side By Side comparison of Zhaojin Mining Industry's Earnings Growth And 2.0% ROE

It is hard to argue that Zhaojin Mining Industry's ROE is much good in and of itself. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Zhaojin Mining Industry was still able to see a decent net income growth of 11% over the past five years. We reckon that there could be other factors at play here. 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 compared Zhaojin Mining Industry's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 23% in the same period, which is a bit concerning.

past-earnings-growth
SEHK:1818 Past Earnings Growth January 25th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 1818? You can find out in our latest intrinsic value infographic research report.

Is Zhaojin Mining Industry Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Zhaojin Mining Industry is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Zhaojin Mining Industry has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 17% over the next three years. As a result, the expected drop in Zhaojin Mining Industry's payout ratio explains the anticipated rise in the company's future ROE to 7.9%, over the same period.

Conclusion

Overall, we feel that Zhaojin Mining Industry certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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