Are Poor Financial Prospects Dragging Down Shenzhen JT Automation Equipment Co.,Ltd (SZSE:300400 Stock?

It is hard to get excited after looking at Shenzhen JT Automation EquipmentLtd's (SZSE:300400) recent performance, when its stock has declined 19% over the past month. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Shenzhen JT Automation EquipmentLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Shenzhen JT Automation EquipmentLtd

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 Shenzhen JT Automation EquipmentLtd is:

7.6% = CN¥59m ÷ CN¥785m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Shenzhen JT Automation EquipmentLtd's Earnings Growth And 7.6% ROE

When you first look at it, Shenzhen JT Automation EquipmentLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.3% doesn't go unnoticed by us. However, Shenzhen JT Automation EquipmentLtd's five year net income decline rate was 7.6%. 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 shrinking earnings.

However, when we compared Shenzhen JT Automation EquipmentLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.4% in the same period. This is quite worrisome.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shenzhen JT Automation EquipmentLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen JT Automation EquipmentLtd Making Efficient Use Of Its Profits?

Shenzhen JT Automation EquipmentLtd's high three-year median payout ratio of 200% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. To know the 3 risks we have identified for Shenzhen JT Automation EquipmentLtd visit our risks dashboard for free.

Moreover, Shenzhen JT Automation EquipmentLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Shenzhen JT Automation EquipmentLtd. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Shenzhen JT Automation EquipmentLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.