Has Jiangsu Olive Sensors High-Tech Co., Ltd.'s (SZSE:300507) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Jiangsu Olive Sensors High-Tech's (SZSE:300507) stock increased significantly by 20% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Jiangsu Olive Sensors High-Tech's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Jiangsu Olive Sensors High-Tech

How To Calculate Return On Equity?

ROE 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 Olive Sensors High-Tech is:

8.9% = CN¥194m ÷ CN¥2.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Jiangsu Olive Sensors High-Tech's Earnings Growth And 8.9% ROE

When you first look at it, Jiangsu Olive Sensors High-Tech's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 8.3%, we may spare it some thought. Particularly, the exceptional 20% net income growth seen by Jiangsu Olive Sensors High-Tech over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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 Jiangsu Olive Sensors High-Tech's growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangsu Olive Sensors High-Tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Olive Sensors High-Tech Making Efficient Use Of Its Profits?

The three-year median payout ratio for Jiangsu Olive Sensors High-Tech is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Jiangsu Olive Sensors High-Tech is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Jiangsu Olive Sensors High-Tech has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Jiangsu Olive Sensors High-Tech certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Jiangsu Olive Sensors High-Tech.

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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.