Jiangsu LiXing General Steel Ball Co.,Ltd.'s (SZSE:300421) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Jiangsu LiXing General Steel BallLtd's (SZSE:300421) stock is up by a considerable 29% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Jiangsu LiXing General Steel BallLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Jiangsu LiXing General Steel BallLtd

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 Jiangsu LiXing General Steel BallLtd is:

4.7% = CN¥58m ÷ CN¥1.2b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 4.7% ROE

As you can see, Jiangsu LiXing General Steel BallLtd's ROE looks pretty weak. Even compared to the average industry ROE of 8.1%, the company's ROE is quite dismal. Thus, the low net income growth of 4.4% seen by Jiangsu LiXing General Steel BallLtd over the past five years could probably be the result of it having a lower ROE.

We then compared Jiangsu LiXing General Steel BallLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.9% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Jiangsu LiXing General Steel BallLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

The high three-year median payout ratio of 53% (that is, the company retains only 47% of its income) over the past three years for Jiangsu LiXing General Steel BallLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Jiangsu LiXing General Steel BallLtd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Jiangsu LiXing General Steel BallLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.