Jafron Biomedical Co.,Ltd.'s (SZSE:300529) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Jafron BiomedicalLtd (SZSE:300529) has had a great run on the share market with its stock up by a significant 19% over the last 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. Particularly, we will be paying attention to Jafron BiomedicalLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Jafron BiomedicalLtd

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 Jafron BiomedicalLtd is:

16% = CN¥514m ÷ CN¥3.2b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Jafron BiomedicalLtd's Earnings Growth And 16% ROE

To begin with, Jafron BiomedicalLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.4%. However, for some reason, the higher returns aren't reflected in Jafron BiomedicalLtd's meagre five year net income growth average of 2.7%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Jafron BiomedicalLtd's reported growth was lower than the industry growth of 6.5% over the last few years, which is not something we like 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). 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 Jafron BiomedicalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jafron BiomedicalLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Jafron BiomedicalLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Jafron BiomedicalLtd has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we feel that Jafron BiomedicalLtd 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. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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