Jiangsu Kangliyuan Sports Tech. Co., Ltd. (SZSE:301287) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that Jiangsu Kangliyuan Sports Tech's (SZSE:301287) stock increased significantly by 31% over the past three months. 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. Specifically, we decided to study Jiangsu Kangliyuan Sports Tech's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Jiangsu Kangliyuan Sports Tech

How Do You 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 Jiangsu Kangliyuan Sports Tech is:

4.8% = CN¥53m ÷ CN¥1.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Has ROE Got To Do With 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 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 Kangliyuan Sports Tech's Earnings Growth And 4.8% ROE

It is hard to argue that Jiangsu Kangliyuan Sports Tech's ROE is much good in and of itself. Even compared to the average industry ROE of 7.6%, the company's ROE is quite dismal. For this reason, Jiangsu Kangliyuan Sports Tech's five year net income decline of 6.6% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared Jiangsu Kangliyuan Sports Tech's performance with the industry and found thatJiangsu Kangliyuan Sports Tech's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 3.4% in the same period, which is a slower than the company.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Jiangsu Kangliyuan Sports Tech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Kangliyuan Sports Tech Making Efficient Use Of Its Profits?

Jiangsu Kangliyuan Sports Tech's low three-year median payout ratio of 24% (or a retention ratio of 76%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Jiangsu Kangliyuan Sports Tech only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

On the whole, we feel that the performance shown by Jiangsu Kangliyuan Sports Tech can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 would have the 3 risks we have identified for Jiangsu Kangliyuan Sports Tech.

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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.