TJK Intelligent Equipment Manufacturing (Tianjin) Co., Ltd.'s (SZSE:300823) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

TJK Intelligent Equipment Manufacturing (Tianjin) (SZSE:300823) has had a great run on the share market with its stock up by a significant 13% over the last week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on TJK Intelligent Equipment Manufacturing (Tianjin)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for TJK Intelligent Equipment Manufacturing (Tianjin)

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for TJK Intelligent Equipment Manufacturing (Tianjin) is:

6.2% = CN¥62m ÷ CN¥1.0b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 in profit.

What Has ROE Got To Do With 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

TJK Intelligent Equipment Manufacturing (Tianjin)'s Earnings Growth And 6.2% ROE

On the face of it, TJK Intelligent Equipment Manufacturing (Tianjin)'s ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.9%, we may spare it some thought. Having said that, TJK Intelligent Equipment Manufacturing (Tianjin)'s five year net income decline rate was 18%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

That being said, we compared TJK Intelligent Equipment Manufacturing (Tianjin)'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 9.5% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is TJK Intelligent Equipment Manufacturing (Tianjin) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TJK Intelligent Equipment Manufacturing (Tianjin) Making Efficient Use Of Its Profits?

TJK Intelligent Equipment Manufacturing (Tianjin) has a high three-year median payout ratio of 95% (that is, it is retaining 5.2% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 4 risks we have identified for TJK Intelligent Equipment Manufacturing (Tianjin) visit our risks dashboard for free.

Moreover, TJK Intelligent Equipment Manufacturing (Tianjin) has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we would be extremely cautious before making any decision on TJK Intelligent Equipment Manufacturing (Tianjin). Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on TJK Intelligent Equipment Manufacturing (Tianjin) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com