Are Robust Financials Driving The Recent Rally In Jiangsu Hengshang Energy Conservation Technology Co., Ltd.'s (SHSE:603137) Stock?

Jiangsu Hengshang Energy Conservation Technology (SHSE:603137) has had a great run on the share market with its stock up by a significant 19% over the last month. 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 Jiangsu Hengshang Energy Conservation 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.

View our latest analysis for Jiangsu Hengshang Energy Conservation Technology

How Do You 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 Hengshang Energy Conservation Technology is:

11% = CN¥130m ÷ CN¥1.2b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

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

Jiangsu Hengshang Energy Conservation Technology's Earnings Growth And 11% ROE

At first glance, Jiangsu Hengshang Energy Conservation Technology seems to have a decent ROE. On comparing with the average industry ROE of 7.5% the company's ROE looks pretty remarkable. This probably laid the ground for Jiangsu Hengshang Energy Conservation Technology's moderate 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Jiangsu Hengshang Energy Conservation Technology's growth is quite high when compared to the industry average growth of 3.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangsu Hengshang Energy Conservation Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Hengshang Energy Conservation Technology Using Its Retained Earnings Effectively?

Jiangsu Hengshang Energy Conservation Technology's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Along with seeing a growth in earnings, Jiangsu Hengshang Energy Conservation Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we are quite pleased with Jiangsu Hengshang Energy Conservation 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. To know the 1 risk we have identified for Jiangsu Hengshang Energy Conservation Technology visit our risks dashboard for free.

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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.