Are Robust Financials Driving The Recent Rally In Chongqing Sanfeng Environment Group Corp., Ltd.’s (SHSE:601827) Stock?

Most readers would already be aware that Chongqing Sanfeng Environment Group’s (SHSE:601827) stock increased significantly by 18% over the past month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Chongqing Sanfeng Environment Group’s ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Chongqing Sanfeng Environment Group

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 Chongqing Sanfeng Environment Group is:

11% = CN¥1.3b ÷ CN¥11b (Based on the trailing twelve months to June 2024).

The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Chongqing Sanfeng Environment Group’s Earnings Growth And 11% ROE

To begin with, Chongqing Sanfeng Environment Group seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 8.0%. This certainly adds some context to Chongqing Sanfeng Environment Group’s decent 15% net income growth seen over the past five years.

We then compared Chongqing Sanfeng Environment Group’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 9.8% in the same 5-year period.

SHSE:601827 Past Earnings Growth October 23rd 2024

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Chongqing Sanfeng Environment Group is trading on a high P/E or a low P/E, relative to its industry.

Is Chongqing Sanfeng Environment Group Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Chongqing Sanfeng Environment Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

Besides, Chongqing Sanfeng Environment Group has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Chongqing Sanfeng Environment Group’s performance has been quite good. 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. 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 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.