Is Weakness In Xinjiang Daqo New Energy Co.,Ltd. (SHSE:688303) Stock A Sign That The Market Could Be Wrong Given Its Strong Financial Prospects?

Simply Wall St · Mar 27 14:47

With its stock down 5.2% over the past week, it is easy to disregard Xinjiang Daqo New EnergyLtd (SHSE:688303). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Xinjiang Daqo New EnergyLtd's ROE.

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 Do You 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 Xinjiang Daqo New EnergyLtd is:

13% = CN¥5.8b ÷ CN¥43b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Xinjiang Daqo New EnergyLtd's Earnings Growth And 13% ROE

To start with, Xinjiang Daqo New EnergyLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.2%. This certainly adds some context to Xinjiang Daqo New EnergyLtd's exceptional 42% 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.

We then compared Xinjiang Daqo New EnergyLtd'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 26% in the same 5-year period.

past-earnings-growth — SHSE:688303 Past Earnings Growth March 27th 2024

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Xinjiang Daqo New EnergyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Xinjiang Daqo New EnergyLtd Efficiently Re-investing Its Profits?

Xinjiang Daqo New EnergyLtd has a three-year median payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. So it seems that Xinjiang Daqo New EnergyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Xinjiang Daqo New EnergyLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 10% over the next three years. The fact that the company's ROE is expected to rise to 54% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we are quite pleased with Xinjiang Daqo New EnergyLtd'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. 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.

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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.

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