Jiangsu Maixinlin Aviation Science and Technology Corp.'s (SHSE:688685) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Jiangsu Maixinlin Aviation Science and Technology's (SHSE:688685) stock is up by a considerable 14% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Jiangsu Maixinlin Aviation Science and Technology's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

How Is ROE Calculated?

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 Maixinlin Aviation Science and Technology is:

2.4% = CN¥17m ÷ CN¥706m (Based on the trailing twelve months to March 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¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Maixinlin Aviation Science and Technology's Earnings Growth And 2.4% ROE

It is quite clear that Jiangsu Maixinlin Aviation Science and Technology's ROE is rather low. Even compared to the average industry ROE of 4.8%, the company's ROE is quite dismal. For this reason, Jiangsu Maixinlin Aviation Science and Technology's five year net income decline of 17% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Jiangsu Maixinlin Aviation Science and Technology's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 10% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jiangsu Maixinlin Aviation Science and Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Maixinlin Aviation Science and Technology Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 81% (implying that 19% of the profits are retained), most of Jiangsu Maixinlin Aviation Science and Technology's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 5 risks we have identified for Jiangsu Maixinlin Aviation Science and Technology.

Additionally, Jiangsu Maixinlin Aviation Science and Technology started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Conclusion

On the whole, Jiangsu Maixinlin Aviation Science and Technology's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Jiangsu Maixinlin Aviation Science and Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.