Beijing Haohua Energy Resource (SHSE:601101) has had a great run on the share market with its stock up by a significant 27% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Beijing Haohua Energy Resource's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Beijing Haohua Energy Resource is:

9.9% = CN¥1.4b ÷ CN¥15b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Is The Relationship Between ROE And 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.

Beijing Haohua Energy Resource's Earnings Growth And 9.9% ROE

At first glance, Beijing Haohua Energy Resource's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 12%, we may spare it some thought. Particularly, the exceptional 30% net income growth seen by Beijing Haohua Energy Resource over the past five years is pretty remarkable. 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 example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Beijing Haohua Energy Resource's 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%.

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. What is 601101 worth today? The intrinsic value infographic in our free research report helps visualize whether 601101 is currently mispriced by the market.

Is Beijing Haohua Energy Resource Making Efficient Use Of Its Profits?

Beijing Haohua Energy Resource has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Beijing Haohua Energy Resource is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Beijing Haohua Energy Resource has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Beijing Haohua Energy Resource has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.