Is the recent stock performance of China Nature Energy Technology Holdings Limited (HKG:1597) influenced in any way by its fundamentals?
China Nature Energy Technology Holdings (HKG:1597) has had a strong run in the equity market with a significant 11% rise in its shares over the past week. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . Specifically, we decided to study the ROE of China Nature Energy Technology Holdings in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for China Nature Energy Technology Holdings
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of China Nature Energy Technology Holdings is:
8.2% = CN¥21 million ÷ CN¥260 million (based on the last twelve months to December 2021).
The “return” is the annual profit. This therefore means that for each investment of HK$1 by its shareholder, the company generates a profit of 0.08 HK$.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
China Nature Energy Technology Holdings Earnings Growth and ROE of 8.2%
At first glance, the ROE of China Nature Energy Technology Holdings is not much to say. However, its ROE is similar to the industry average of 8.4%, so we’re not going to completely dismiss the company. In contrast, China Nature Energy Technology Holdings has recorded a moderate growth of 16% in net profit over the past five years. Considering that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. Such as – high revenue retention or effective management in place.
In a next step, we benchmarked China Nature Energy Technology Holdings’ net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 16%. during the same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A 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 outlook. So, you might want to check if China Nature Energy Technology Holdings is trading on a high P/E or a low P/E, relative to its industry.
Does China Nature Energy Technology Holdings effectively use its retained earnings?
China Nature Energy Technology Holdings does not pay any dividends, which means that all of its profits are reinvested in the business, which explains the company’s good earnings growth.
Overall, we believe that China Nature Energy Technology Holdings has positive characteristics. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 2 risks we have identified for China Nature Energy Technology Holdings, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.