Is Xinyi Energy Holdings Limited's (HKG:3868) Recent Price Movement Underpinned By Its Weak Fundamentals?

Xinyi Energy Holdings (HKG:3868) has had a rough three months with its share price down 37%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Xinyi Energy Holdings' ROE today.

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.

View our latest analysis for Xinyi Energy Holdings

How Do You Calculate Return On Equity?

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 Xinyi Energy Holdings is:

7.2% = HK$918m ÷ HK$13b (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

A Side By Side comparison of Xinyi Energy Holdings' Earnings Growth And 7.2% ROE

At first glance, Xinyi Energy Holdings' ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. On the other hand, Xinyi Energy Holdings reported a moderate 8.8% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some 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.

We then compared Xinyi Energy Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.3% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Xinyi Energy Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xinyi Energy Holdings Using Its Retained Earnings Effectively?

Xinyi Energy Holdings' high three-year median payout ratio of 101% suggests that the company is paying out more to its shareholders than what it is making. However, this hasn't really hampered its ability to grow as we saw earlier. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. To know the 2 risks we have identified for Xinyi Energy Holdings visit our risks dashboard for free.

Moreover, Xinyi Energy Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 55% over the next three years. As a result, the expected drop in Xinyi Energy Holdings' payout ratio explains the anticipated rise in the company's future ROE to 11%, over the same period.

Conclusion

In total, we're a bit ambivalent about Xinyi Energy Holdings' performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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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.