Declining Stock and Solid Fundamentals: Is The Market Wrong About Jiangsu Guomao Reducer Co., Ltd. (SHSE:603915)?

Jiangsu Guomao Reducer (SHSE:603915) has had a rough month with its share price down 33%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Jiangsu Guomao Reducer'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 Guomao Reducer

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiangsu Guomao Reducer is:

10% = CN¥378m ÷ CN¥3.7b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Jiangsu Guomao Reducer's Earnings Growth And 10% ROE

When you first look at it, Jiangsu Guomao Reducer's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.9% which we definitely can't overlook. This probably goes some way in explaining Jiangsu Guomao Reducer's moderate 10.0% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

We then performed a comparison between Jiangsu Guomao Reducer's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.5% in the same 5-year period.

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. Has the market priced in the future outlook for 603915? You can find out in our latest intrinsic value infographic research report.

Is Jiangsu Guomao Reducer Making Efficient Use Of Its Profits?

Jiangsu Guomao Reducer has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Jiangsu Guomao Reducer is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Still, forecasts suggest that Jiangsu Guomao Reducer's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Jiangsu Guomao Reducer's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com