Are Strong Financial Prospects The Force That Is Driving The Momentum In Jiangnan Mould & Plastic Technology Co., Ltd.'s SZSE:000700) Stock?

Most readers would already be aware that Jiangnan Mould & Plastic Technology's (SZSE:000700) stock increased significantly by 43% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Jiangnan Mould & Plastic Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jiangnan Mould & Plastic Technology

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 Jiangnan Mould & Plastic Technology is:

15% = CN¥575m ÷ CN¥3.7b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 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. 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.

A Side By Side comparison of Jiangnan Mould & Plastic Technology's Earnings Growth And 15% ROE

To begin with, Jiangnan Mould & Plastic Technology seems to have a respectable ROE. Especially when compared to the industry average of 8.2% the company's ROE looks pretty impressive. This probably laid the ground for Jiangnan Mould & Plastic Technology's significant 46% net income growth seen over the past 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.

As a next step, we compared Jiangnan Mould & Plastic Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.0%.

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 Jiangnan Mould & Plastic Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangnan Mould & Plastic Technology Efficiently Re-investing Its Profits?

The three-year median payout ratio for Jiangnan Mould & Plastic Technology is 39%, which is moderately low. The company is retaining the remaining 61%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangnan Mould & Plastic Technology is reinvesting its earnings efficiently.

Besides, Jiangnan Mould & Plastic Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Jiangnan Mould & Plastic Technology'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. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Jiangnan Mould & Plastic Technology.

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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.