Jinglv Environment Science and Technology Co., Ltd's (SZSE:001230) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Jinglv Environment Science and Technology's (SZSE:001230) stock increased significantly by 17% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Jinglv Environment Science and Technology'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 Jinglv Environment Science and Technology

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jinglv Environment Science and Technology is:

8.0% = CN¥148m ÷ CN¥1.9b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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. 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.

A Side By Side comparison of Jinglv Environment Science and Technology's Earnings Growth And 8.0% ROE

On the face of it, Jinglv Environment Science and Technology's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.9%, is definitely interesting. Still, Jinglv Environment Science and Technology's net income growth of 3.8% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

We then performed a comparison between Jinglv Environment Science and Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 3.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Jinglv Environment Science and Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jinglv Environment Science and Technology Using Its Retained Earnings Effectively?

Jinglv Environment Science and Technology's low three-year median payout ratio of 18% (or a retention ratio of 82%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this fact. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Only recently, Jinglv Environment Science and Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

Overall, we feel that Jinglv Environment Science and Technology certainly does have some positive factors to consider. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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. To know the 2 risks we have identified for Jinglv Environment Science and Technology 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.