Jiangsu LiXing General Steel Ball Co.,Ltd. (SZSE:300421) Stock's On A Decline: Are Poor Fundamentals The Cause?

With its stock down 28% over the past month, it is easy to disregard Jiangsu LiXing General Steel BallLtd (SZSE:300421). 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 Jiangsu LiXing General Steel BallLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jiangsu LiXing General Steel BallLtd

How To Calculate Return On Equity?

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 Jiangsu LiXing General Steel BallLtd is:

4.3% = CN¥54m ÷ CN¥1.2b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Jiangsu LiXing General Steel BallLtd's Earnings Growth And 4.3% ROE

It is hard to argue that Jiangsu LiXing General Steel BallLtd's ROE is much good in and of itself. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Accordingly, Jiangsu LiXing General Steel BallLtd's low net income growth of 4.4% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Jiangsu LiXing General Steel BallLtd's reported growth was lower than the industry growth of 9.2% over the last few years, which is not something we like 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 Jiangsu LiXing General Steel BallLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu LiXing General Steel BallLtd Efficiently Re-investing Its Profits?

Jiangsu LiXing General Steel BallLtd has a three-year median payout ratio of 63% (implying that it keeps only 37% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Jiangsu LiXing General Steel BallLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Jiangsu LiXing General Steel BallLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. You can see the 2 risks we have identified for Jiangsu LiXing General Steel BallLtd by visiting our risks dashboard for free on our platform here.

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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.