Is Hainan Jinpan Smart Technology Co., Ltd.'s (SHSE:688676) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Hainan Jinpan Smart Technology's (SHSE:688676) stock increased significantly by 29% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Hainan Jinpan Smart Technology's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hainan Jinpan Smart Technology

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 Hainan Jinpan Smart Technology is:

13% = CN¥570m ÷ CN¥4.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Hainan Jinpan Smart Technology's Earnings Growth And 13% ROE

To begin with, Hainan Jinpan Smart Technology seems to have a respectable ROE. On comparing with the average industry ROE of 6.5% the company's ROE looks pretty remarkable. This certainly adds some context to Hainan Jinpan Smart Technology's exceptional 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Hainan Jinpan Smart Technology's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hainan Jinpan Smart Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hainan Jinpan Smart Technology Using Its Retained Earnings Effectively?

Hainan Jinpan Smart Technology has a three-year median payout ratio of 36% (where it is retaining 64% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hainan Jinpan Smart Technology is reinvesting its earnings efficiently.

Moreover, Hainan Jinpan Smart Technology is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. Still, forecasts suggest that Hainan Jinpan Smart Technology's future ROE will rise to 21% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Hainan Jinpan Smart Technology's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.