Declining Stock and Decent Financials: Is The Market Wrong About Sichuan Jiuzhou Electronic Co., Ltd. (SZSE:000801)?

It is hard to get excited after looking at Sichuan Jiuzhou Electronic's (SZSE:000801) recent performance, when its stock has declined 21% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Sichuan Jiuzhou Electronic's ROE.

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.

Check out our latest analysis for Sichuan Jiuzhou Electronic

How Do You Calculate Return On Equity?

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 Sichuan Jiuzhou Electronic is:

7.4% = CN¥243m ÷ CN¥3.3b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Sichuan Jiuzhou Electronic's Earnings Growth And 7.4% ROE

When you first look at it, Sichuan Jiuzhou Electronic's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.8%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Sichuan Jiuzhou Electronic was able to grow its net income considerably, at a rate of 27% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Sichuan Jiuzhou Electronic's growth is quite high when compared to the industry average growth of 6.1% 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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sichuan Jiuzhou Electronic's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sichuan Jiuzhou Electronic Making Efficient Use Of Its Profits?

The three-year median payout ratio for Sichuan Jiuzhou Electronic is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Sichuan Jiuzhou Electronic is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Sichuan Jiuzhou Electronic is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

On the whole, we do feel that Sichuan Jiuzhou Electronic has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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