Tongling Jingda Special Magnet Wire Co., Ltd. (SHSE:600577) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Tongling Jingda Special Magnet Wire's (SHSE:600577) stock is up by a considerable 39% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Tongling Jingda Special Magnet Wire'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Tongling Jingda Special Magnet Wire

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 Tongling Jingda Special Magnet Wire is:

9.8% = CN¥546m ÷ CN¥5.6b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 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. 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.

A Side By Side comparison of Tongling Jingda Special Magnet Wire's Earnings Growth And 9.8% ROE

On the face of it, Tongling Jingda Special Magnet Wire's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Still, Tongling Jingda Special Magnet Wire has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

As a next step, we compared Tongling Jingda Special Magnet Wire's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Tongling Jingda Special Magnet Wire fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tongling Jingda Special Magnet Wire Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 60% (implying that the company keeps only 40% of its income) of its business to reinvest into its business), most of Tongling Jingda Special Magnet Wire's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Tongling Jingda Special Magnet Wire has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Tongling Jingda Special Magnet Wire can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.