Chengdu Xingrong Environment Co., Ltd. (SZSE:000598) Share price has shown weakness recently, but financials look solid: should shareholder candidates make the leap?

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It’s easy to ignore Chengdu Xingrong Environment (SZSE:000598), with its share price down 4.9% over the past week. However, a closer look at the company’s healthy financials might make you think again. The company is worth keeping an eye on, given that fundamentals usually drive long-term market outcomes. In this article, we decided to focus on Chengdu Xingrong Environment’s ROE.

Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company’s shareholders.

Check out our latest analysis for Chengdu Xingrong Environment.

How is ROE calculated?

ROE can be calculated using the following formula:

Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity

So, based on the above formula, the ROE for Chengdu Xingrong Environment is:

11% = CAD 1.8 billion ÷ CAD 17 billion (based on trailing 12 months to September 2023).

“Return” is the annual profit. That is, for every CN 1 of a shareholder’s investment, the company will generate a profit of 0.11 CN for him.

What is the relationship between ROE and profit growth?

It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.

Chengdu Xingrong Environment’s revenue growth and ROE 11%

At first glance, Chengdu Xingrong Environment’s ROE does not seem to be very promising. However, the fact that his ROE is quite high compared to the industry average of 8.7% doesn’t go unnoticed by us. As a result, the foundation may have been laid for Chengdu Xingrong Environment to grow by a decent 12% over the past five years. That being said, his ROE for the company is a little low to begin with, but it’s just that it’s higher than the industry average. Therefore, there may be other reasons for the increase in revenue. For example, the industry as a whole may be experiencing a period of high growth, or the company’s dividend payout ratio may be low.

As a next step, we compared Chengdu Xingrong Environment’s net profit growth with its industry. Pleasantly, we found that the company’s growth is higher than the industry average of his 7.5%.

SZSE:000598 Historical Revenue Growth Rate February 27, 2024

The foundations that give a company value have a lot to do with its revenue growth. Investors should check whether expected growth or decline in earnings has been factored in in any case. This will help you determine whether the stock’s future is bright or bleak. Is Chengdu Xingrong Environment valued significantly compared to other companies? These 3 metrics can help you decide.

Does Chengdu Xingrong Environment reinvest profits efficiently?

Chengdu Xingrong Environment’s three-year median payout ratio is a low 20%, meaning the company retains the remaining 80% of its profits. This suggests that management is reinvesting most of its profits into growing the business.

Additionally, Chengdu Xingrong Environmental has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders.

conclusion

Overall, we are very satisfied with the performance of Chengdu Xingrong environment. In particular, we like that the company reinvests heavily in its business at a reasonable rate of return. Unsurprisingly, this led to impressive profit growth. Having said that, a review of the latest analyst forecasts indicates that the company’s future revenue growth is expected to slow. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company’s fundamentals? Click here to be taken to the page with analyst forecasts for the company .

Valuation is complex, but we help make it simple.

Check out our comprehensive analysis, including below, to see if Chengdu Xingrong Environment is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

See free analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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