China Xiangtai Food Co., Ltd.'s (NASDAQ:PLIN) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
China Xiangtai Food (NASDAQ:PLIN) has had a great run on the share market with its stock up by a significant 61% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to China Xiangtai Food’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for China Xiangtai Food
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for China Xiangtai Food is:
11% = US$2.6m ÷ US$25m (Based on the trailing twelve months to December 2019).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $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. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
China Xiangtai Food’s Earnings Growth And 11% ROE
At first glance, China Xiangtai Food seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 10%. This probably goes some way in explaining China Xiangtai Food’s moderate 9.5% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that China Xiangtai Food’s growth is quite high when compared to the industry average growth of 2.8% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. 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 China Xiangtai Food is trading on a high P/E or a low P/E, relative to its industry.
Is China Xiangtai Food Using Its Retained Earnings Effectively?
Summary
On the whole, we feel that China Xiangtai Food’s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 5 risks we have identified for China Xiangtai Food.
This article by Simply Wall St is general in nature. 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.
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