Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd (SHSE:603227) has had a great run on the share market with its stock up by a significant 14% over the last month. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
Return on equity 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 Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is:
16% = CN¥838m ÷ CN¥5.2b (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.
What Has ROE Got To Do With 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.
Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Earnings Growth And 16% ROE
At first glance, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd seems to have a decent ROE. On comparing with the average industry ROE of 7.0% the company's ROE looks pretty remarkable. This certainly adds some context to Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's exceptional 55% net income growth seen over the past five years. However, there could also be other causes behind this growth. 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 Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's 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 12% in the same 5-year period.
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). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.
Is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd Making Efficient Use Of Its Profits?
Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has a really low three-year median payout ratio of 19%, meaning that it has the remaining 81% left over to reinvest into its business. So it looks like Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Conclusion
Overall, we are quite pleased with Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.