TJK Intelligent Equipment Manufacturing (Tianjin) Co., Ltd.'s (SZSE:300823) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

TJK Intelligent Equipment Manufacturing (Tianjin) (SZSE:300823) has had a great run on the share market with its stock up by a significant 11% over the last week. 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 TJK Intelligent Equipment Manufacturing (Tianjin)'s ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for TJK Intelligent Equipment Manufacturing (Tianjin)

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 TJK Intelligent Equipment Manufacturing (Tianjin) is:

5.5% = CN¥53m ÷ CN¥964m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

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.

TJK Intelligent Equipment Manufacturing (Tianjin)'s Earnings Growth And 5.5% ROE

At first glance, TJK Intelligent Equipment Manufacturing (Tianjin)'s ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. But then again, TJK Intelligent Equipment Manufacturing (Tianjin)'s five year net income shrunk at a rate of 16%. 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 7.4% 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. 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?

With a high three-year median payout ratio of 97% (implying that 2.6% of the profits are retained), most of TJK Intelligent Equipment Manufacturing (Tianjin)'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 3 risks we have identified for TJK Intelligent Equipment Manufacturing (Tianjin).

In addition, TJK Intelligent Equipment Manufacturing (Tianjin) has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we would be extremely cautious before making any decision on TJK Intelligent Equipment Manufacturing (Tianjin). Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. 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 TJK Intelligent Equipment Manufacturing (Tianjin)'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.