Do Its Financials Have Any Role To Play In Driving Jiangyin Electrical Alloy Co.,Ltd's (SZSE:300697) Stock Up Recently?

Most readers would already be aware that Jiangyin Electrical AlloyLtd's (SZSE:300697) stock increased significantly by 15% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Jiangyin Electrical AlloyLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Jiangyin Electrical AlloyLtd

How To Calculate Return On Equity?

Return on equity 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 Jiangyin Electrical AlloyLtd is:

12% = CN¥127m ÷ CN¥1.1b (Based on the trailing twelve months to June 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¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Jiangyin Electrical AlloyLtd's Earnings Growth And 12% ROE

At first glance, Jiangyin Electrical AlloyLtd seems to have a decent ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. Despite this, Jiangyin Electrical AlloyLtd's five year net income growth was quite low averaging at only 2.4%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Jiangyin Electrical AlloyLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangyin Electrical AlloyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangyin Electrical AlloyLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 51% (that is, the company retains only 49% of its income) over the past three years for Jiangyin Electrical AlloyLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Jiangyin Electrical AlloyLtd has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we do feel that Jiangyin Electrical AlloyLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Jiangyin Electrical AlloyLtd 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.