Falling Stocks and Strong Fundamentals: Is the Market Wrong About China Nonferrous Mining Corporation Limited (HKG: 1258)?
It’s hard to get excited after looking at the recent performance of China Nonferrous Mining (HKG: 1258), as its stock has fallen 20% in the past three months. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. In this article, we have decided to focus on the ROE of China Nonferrous Mining.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for non-ferrous mining in China
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for China Nonferrous Mining is:
12% = US $ 197 million Ã· US $ 1.7 billion (based on the last twelve months up to December 2020).
The “return” is the annual profit. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.12.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
China Nonferrous Mining profit growth and 12% ROE
For starters, China Nonferrous Mining’s ROE seems acceptable. Compared to the industry average ROE of 8.6%, the company’s ROE looks quite remarkable. This likely laid the groundwork for China Nonferrous Mining’s significant 50% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, the business has a low payout ratio or is managed efficiently.
Then, comparing with the industry net income growth, we found that the growth of China Nonferrous Mining is quite high compared to the industry average growth of 22% during the same period, which is great to see.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. Has the market taken into account the future outlook for 1258? You can find out in our latest Intrinsic Value infographic research report.
Is Non-Ferrous Mining in China Efficiently Using Its Retained Profits?
China Nonferrous Mining has a very low three-year median payout rate of 22%, meaning it has the remaining 78% to reinvest in its business. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
Additionally, China Nonferrous Mining has paid dividends over a seven-year period, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 63% over the next three years. However, the future ROE of China Nonferrous Mining is expected to increase to 18% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be behind the anticipated growth of the company’s ROE.
All in all, we are quite satisfied with the performance of China Nonferrous Mining. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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