Jiangsu Huayang Intelligent Equipment Co.,Ltd.'s (SZSE:301502) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Most readers would already be aware that Jiangsu Huayang Intelligent EquipmentLtd's (SZSE:301502) stock increased significantly by 11% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Jiangsu Huayang Intelligent EquipmentLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Jiangsu Huayang Intelligent EquipmentLtd

How Is ROE Calculated?

Return on equity 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 Huayang Intelligent EquipmentLtd is:

7.2% = CN¥60m ÷ CN¥829m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. 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 Huayang Intelligent EquipmentLtd's Earnings Growth And 7.2% ROE

When you first look at it, Jiangsu Huayang Intelligent EquipmentLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.9%, we may spare it some thought. On the other hand, Jiangsu Huayang Intelligent EquipmentLtd reported a fairly low 4.7% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

We then compared Jiangsu Huayang Intelligent EquipmentLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Huayang Intelligent EquipmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Huayang Intelligent EquipmentLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 36% (or a retention ratio of 64% over the past three years, Jiangsu Huayang Intelligent EquipmentLtd has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Conclusion

On the whole, we feel that the performance shown by Jiangsu Huayang Intelligent EquipmentLtd can be open to many interpretations. 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. Our risks dashboard will have the 1 risk we have identified for Jiangsu Huayang Intelligent EquipmentLtd.

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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