Jiangsu Jiangnan High Polymer Fiber Co.,Ltd's (SHSE:600527) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Jiangsu Jiangnan High Polymer FiberLtd's (SHSE:600527) stock is up by a considerable 87% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Jiangsu Jiangnan High Polymer FiberLtd's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Jiangsu Jiangnan High Polymer FiberLtd

How To Calculate Return On Equity?

Return on equity 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 Jiangsu Jiangnan High Polymer FiberLtd is:

1.9% = CN¥40m ÷ CN¥2.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 in profit.

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 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.

A Side By Side comparison of Jiangsu Jiangnan High Polymer FiberLtd's Earnings Growth And 1.9% ROE

It is quite clear that Jiangsu Jiangnan High Polymer FiberLtd's ROE is rather low. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 24% seen by Jiangsu Jiangnan High Polymer FiberLtd was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

However, when we compared Jiangsu Jiangnan High Polymer FiberLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.9% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Jiangnan High Polymer FiberLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Jiangnan High Polymer FiberLtd Making Efficient Use Of Its Profits?

Jiangsu Jiangnan High Polymer FiberLtd's high three-year median payout ratio of 191% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. To know the 4 risks we have identified for Jiangsu Jiangnan High Polymer FiberLtd visit our risks dashboard for free.

In addition, Jiangsu Jiangnan High Polymer FiberLtd 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.

Summary

On the whole, Jiangsu Jiangnan High Polymer FiberLtd's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Jiangsu Jiangnan High Polymer FiberLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.