Is Yankuang Energy Group Company Limited's (HKG:1171) Recent Performance Underpinned By Weak Financials?

With its stock down 13% over the past month, it is easy to disregard Yankuang Energy Group (HKG:1171). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Yankuang Energy Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Yankuang Energy Group is:

9.8% = CN¥14b ÷ CN¥143b (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.10.

See our latest analysis for Yankuang Energy Group

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Yankuang Energy Group's Earnings Growth And 9.8% ROE

When you first look at it, Yankuang Energy Group's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 8.7%, we may spare it some thought. Having said that, Yankuang Energy Group has shown a meagre net income growth of 2.5% over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Yankuang Energy Group's reported growth was lower than the industry growth of 10% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Yankuang Energy Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Yankuang Energy Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 58% (that is, the company retains only 42% of its income) over the past three years for Yankuang Energy Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Yankuang Energy Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 53%. However, Yankuang Energy Group's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Summary

On the whole, Yankuang Energy Group's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.