Could The Market Be Wrong About Jiangxi Xinyu Guoke Technology Co., Ltd (SZSE:300722) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Jiangxi Xinyu Guoke Technology's (SZSE:300722) recent performance, when its stock has declined 16% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Jiangxi Xinyu Guoke Technology's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Jiangxi Xinyu Guoke Technology

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 Jiangxi Xinyu Guoke Technology is:

13% = CN¥76m ÷ CN¥577m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Has ROE Got To Do With 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.

Jiangxi Xinyu Guoke Technology's Earnings Growth And 13% ROE

At first glance, Jiangxi Xinyu Guoke Technology seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.0%. Probably as a result of this, Jiangxi Xinyu Guoke Technology was able to see a decent growth of 6.2% over the last five years.

We then compared Jiangxi Xinyu Guoke Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 14% in the same 5-year period, which is a bit concerning.

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). 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 Jiangxi Xinyu Guoke Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangxi Xinyu Guoke Technology Efficiently Re-investing Its Profits?

Jiangxi Xinyu Guoke Technology has a healthy combination of a moderate three-year median payout ratio of 43% (or a retention ratio of 57%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Jiangxi Xinyu Guoke Technology has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Jiangxi Xinyu Guoke Technology's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising.

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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.