Will Weakness in Jiangling Motors Corporation, Ltd.'s (SZSE:000550) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Jiangling Motors Corporation's (SZSE:000550) recent performance, when its stock has declined 16% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Jiangling Motors Corporation's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Jiangling Motors Corporation

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Jiangling Motors Corporation is:

11% = CN¥1.1b ÷ CN¥10b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Jiangling Motors Corporation's Earnings Growth And 11% ROE

At first glance, Jiangling Motors Corporation seems to have a decent ROE. Especially when compared to the industry average of 5.9% the company's ROE looks pretty impressive. Probably as a result of this, Jiangling Motors Corporation was able to see an impressive net income growth of 44% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Jiangling Motors Corporation's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Jiangling Motors Corporation is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangling Motors Corporation Using Its Retained Earnings Effectively?

Jiangling Motors Corporation has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. So it seems that Jiangling Motors Corporation is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Jiangling Motors Corporation has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. Still, forecasts suggest that Jiangling Motors Corporation's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Jiangling Motors Corporation's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.