It is hard to get excited after looking at Xinyi Solar Holdings' (HKG:968) recent performance, when its stock has declined 9.9% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Xinyi Solar Holdings' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
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 Xinyi Solar Holdings is:
20% = HK$6.8b ÷ HK$34b (Based on the trailing twelve months to June 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.20 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. 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.
Xinyi Solar Holdings' Earnings Growth And 20% ROE
To start with, Xinyi Solar Holdings' ROE looks acceptable. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. This certainly adds some context to Xinyi Solar Holdings' exceptional 22% 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 Xinyi Solar Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.
Earnings growth is a huge factor in stock valuation. 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 Xinyi Solar Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Xinyi Solar Holdings Making Efficient Use Of Its Profits?
Xinyi Solar Holdings has a three-year median payout ratio of 47% (where it is retaining 53% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Xinyi Solar Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Xinyi Solar Holdings has been paying dividends over a period of eight years. 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 over the next three years is expected to be approximately 48%. As a result, Xinyi Solar Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.
On the whole, we feel that Xinyi Solar Holdings' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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.
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