Is Weakness In Jiangsu Yangnong Chemical Co., Ltd. (SHSE:600486) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 18% over the past three months, it is easy to disregard Jiangsu Yangnong Chemical (SHSE:600486). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Jiangsu Yangnong Chemical's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Jiangsu Yangnong Chemical

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 Jiangsu Yangnong Chemical is:

12% = CN¥1.2b ÷ CN¥10b (Based on the trailing twelve months to June 2024).

The 'return' is the profit 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¥0.12.

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 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 Yangnong Chemical's Earnings Growth And 12% ROE

To begin with, Jiangsu Yangnong Chemical seems to have a respectable ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. This probably laid the ground for Jiangsu Yangnong Chemical's moderate 6.8% net income growth seen over the past five years.

As a next step, we compared Jiangsu Yangnong Chemical's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jiangsu Yangnong Chemical is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Yangnong Chemical Efficiently Re-investing Its Profits?

Jiangsu Yangnong Chemical has a low three-year median payout ratio of 22%, meaning that the company retains the remaining 78% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Jiangsu Yangnong Chemical has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Jiangsu Yangnong Chemical's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.