Should Weakness in Jiangsu Ruitai New Energy Materials Co., Ltd.'s (SZSE:301238) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Jiangsu Ruitai New Energy Materials (SZSE:301238) has had a rough three months with its share price down 30%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Jiangsu Ruitai New Energy Materials' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Jiangsu Ruitai New Energy Materials

How Is ROE Calculated?

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:

5.5% = CN¥418m ÷ CN¥7.5b (Based on the trailing twelve months to March 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Jiangsu Ruitai New Energy Materials' Earnings Growth And 5.5% ROE

On the face of it, Jiangsu Ruitai New Energy Materials' 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, Jiangsu Ruitai New Energy Materials has shown a modest net income growth of 16% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Jiangsu Ruitai New Energy Materials' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Jiangsu Ruitai New Energy Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Ruitai New Energy Materials Making Efficient Use Of Its Profits?

Jiangsu Ruitai New Energy Materials' three-year median payout ratio to shareholders is 14% (implying that it retains 86% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

While Jiangsu Ruitai New Energy Materials has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we do feel that Jiangsu Ruitai New Energy Materials has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. You can see the 2 risks we have identified for Jiangsu Ruitai New Energy Materials by visiting our risks dashboard for free on our platform here.

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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.

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