Jiangsu Xiechang Electronic Technology Group Co., Ltd.'s (SZSE:301418) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Jiangsu Xiechang Electronic Technology Group's (SZSE:301418) stock is up by a considerable 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Jiangsu Xiechang Electronic Technology Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangsu Xiechang Electronic Technology Group

How Is ROE Calculated?

ROE 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 Jiangsu Xiechang Electronic Technology Group is:

4.9% = CN¥80m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Jiangsu Xiechang Electronic Technology Group's Earnings Growth And 4.9% ROE

At first glance, Jiangsu Xiechang Electronic Technology Group's ROE doesn't look very promising. Next, when compared to the average industry ROE of 6.9%, the company's ROE leaves us feeling even less enthusiastic. As a result, Jiangsu Xiechang Electronic Technology Group's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that Jiangsu Xiechang Electronic Technology Group's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like 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 Xiechang Electronic Technology Group is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Xiechang Electronic Technology Group Efficiently Re-investing Its Profits?

Jiangsu Xiechang Electronic Technology Group's low three-year median payout ratio of 19%, (meaning the company retains81% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Summary

Overall, we have mixed feelings about Jiangsu Xiechang Electronic Technology Group. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Jiangsu Xiechang Electronic Technology Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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