Is Weakness In Jinchuan Group International Resources Co. Ltd (HKG:2362) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
November 10, 2021
SEHK:2362
Source: Shutterstock

Jinchuan Group International Resources (HKG:2362) has had a rough month with its share price down 22%. 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. In this article, we decided to focus on Jinchuan Group International Resources' ROE.

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

Check out our latest analysis for Jinchuan Group International Resources

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jinchuan Group International Resources is:

13% = US$146m ÷ US$1.1b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.13 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Jinchuan Group International Resources' Earnings Growth And 13% ROE

To start with, Jinchuan Group International Resources' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 13%. This certainly adds some context to Jinchuan Group International Resources' exceptional 34% 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 instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Jinchuan Group International Resources' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 23%.

past-earnings-growth
SEHK:2362 Past Earnings Growth November 11th 2021

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Jinchuan Group International Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jinchuan Group International Resources Making Efficient Use Of Its Profits?

Jinchuan Group International Resources has a really low three-year median payout ratio of 2.9%, meaning that it has the remaining 97% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Along with seeing a growth in earnings, Jinchuan Group International Resources only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Jinchuan Group International Resources' 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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