Shares of China Tianrui Group Cement (HKG:1252) rose 5.3% over the past month. 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. . In particular, we will pay attention to China Tianrui Group Cement’s ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for China Tianrui Group Cement
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for China Tianrui Group Cement is:
8.0% = CN¥1.3b ÷ CN¥16b (based on trailing 12 months to December 2021).
The “return” is the annual profit. One way to conceptualize this is that for every HK$1 of share capital it has, the company has made a profit of HK$0.08.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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 Tianrui Group Cement Earnings Growth and ROE of 8.0%
At first glance, China Tianrui Group Cement’s ROE does not look very promising. However, since the company’s ROE is similar to the industry average ROE of 8.0%, we can spare it some thought. In particular, the outstanding 20% net profit growth recorded by China Tianrui Group Cement over the past five years is quite remarkable. 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. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing China Tianrui Group Cement’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 17% over the same period. .
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you’re wondering about China Tianrui Group Cement’s valuation, check out this indicator of its price/earnings ratio, relative to its industry.
Is China Tianrui Group Cement effectively using its profits?
China Tianrui Group Cement currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
All in all, it seems that China Tianrui Group Cement has positive aspects for its business. Even despite the low rate of return, the company posted impressive earnings growth thanks to massive reinvestment in its business. 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. Our risk dashboard would contain the 2 risks we have identified for China Tianrui Group Cement.
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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.