Can Mixed Fundamentals Have A Negative Impact on Jiangsu Ruitai New Energy Materials Co., Ltd. (SZSE:301238) Current Share Price Momentum?

Jiangsu Ruitai New Energy Materials (SZSE:301238) has had a great run on the share market with its stock up by a significant 50% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Jiangsu Ruitai New Energy Materials' ROE today.

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

Check out our latest analysis for Jiangsu Ruitai New Energy Materials

How To 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 Jiangsu Ruitai New Energy Materials is:

3.1% = CN¥235m ÷ CN¥7.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Jiangsu Ruitai New Energy Materials' Earnings Growth And 3.1% ROE

It is hard to argue that Jiangsu Ruitai New Energy Materials' ROE is much good in and of itself. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Jiangsu Ruitai New Energy Materials' very little net income growth of 4.3% over the past five years.

We then compared Jiangsu Ruitai New Energy Materials' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Jiangsu Ruitai New Energy Materials''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Ruitai New Energy Materials Using Its Retained Earnings Effectively?

Jiangsu Ruitai New Energy Materials has a low three-year median payout ratio of 23% (meaning, the company keeps the remaining 77% of profits) which means that the company is retaining more of its earnings. This should be reflected in its earnings growth number, but that's not the case. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Jiangsu Ruitai New Energy Materials only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Jiangsu Ruitai New Energy Materials' performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Jiangsu Ruitai New Energy Materials 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.