With its stock down 5.3% over the past three months, it is easy to disregard Kunlun Energy (HKG:135). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Kunlun Energy's ROE.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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 Kunlun Energy is:
11% = CN¥9.5b ÷ CN¥89b (Based on the trailing twelve months to December 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.11 in profit.
Check out our latest analysis for Kunlun Energy
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Kunlun Energy's Earnings Growth And 11% ROE
To start with, Kunlun Energy's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.1%. Consequently, this likely laid the ground for the decent growth of 17% seen over the past five years by Kunlun Energy.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Kunlun Energy compares quite favourably to the industry average, which shows a decline of 1.1% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Kunlun Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Kunlun Energy Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 41% (implying that the company retains 59% of its profits), it seems that Kunlun Energy is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Kunlun Energy is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 49%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 9.3%.
Conclusion
On the whole, we feel that Kunlun Energy's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.