Jonjee Hi-Tech Industrial and Commercial Holding Co.,Ltd (SHSE:600872) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

It is hard to get excited after looking at Jonjee Hi-Tech Industrial and Commercial HoldingLtd's (SHSE:600872) recent performance, when its stock has declined 28% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Jonjee Hi-Tech Industrial and Commercial HoldingLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Jonjee Hi-Tech Industrial and Commercial HoldingLtd

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 Jonjee Hi-Tech Industrial and Commercial HoldingLtd is:

34% = CN¥1.8b ÷ CN¥5.4b (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¥0.34.

What Has ROE Got To Do With 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. 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.

Jonjee Hi-Tech Industrial and Commercial HoldingLtd's Earnings Growth And 34% ROE

To begin with, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. Needless to say, we are quite surprised to see that Jonjee Hi-Tech Industrial and Commercial HoldingLtd's net income shrunk at a rate of 21% over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

So, as a next step, we compared Jonjee Hi-Tech Industrial and Commercial HoldingLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 2.9% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 600872 worth today? The intrinsic value infographic in our free research report helps visualize whether 600872 is currently mispriced by the market.

Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 32% (or a retention ratio of 68%) which is pretty normal, Jonjee Hi-Tech Industrial and Commercial HoldingLtd's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 34%. However, Jonjee Hi-Tech Industrial and Commercial HoldingLtd's future ROE is expected to decline to 16% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we feel that Jonjee Hi-Tech Industrial and Commercial HoldingLtd certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, we studied the latest analyst forecasts, and found that analysts are expecting the company's earnings growth to improve slightly. Sure enough, this could bring some relief to shareholders. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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