Jiangsu Jiangnan High Polymer Fiber Co.,Ltd's (SHSE:600527) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Jiangsu Jiangnan High Polymer FiberLtd's (SHSE:600527) stock is up by a considerable 19% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Jiangsu Jiangnan High Polymer FiberLtd's ROE today.

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 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 Is ROE Calculated?

ROE 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:

2.1% = CN¥46m ÷ CN¥2.2b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

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.

A Side By Side comparison of Jiangsu Jiangnan High Polymer FiberLtd's Earnings Growth And 2.1% ROE

It is quite clear that Jiangsu Jiangnan High Polymer FiberLtd's ROE is rather low. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 8.4% 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 8.1% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangsu Jiangnan High Polymer FiberLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared 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 143% 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. You can see the 3 risks we have identified for Jiangsu Jiangnan High Polymer FiberLtd by visiting our risks dashboard for free on our platform here.

Moreover, Jiangsu Jiangnan High Polymer FiberLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Jiangsu Jiangnan High Polymer FiberLtd. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on Jiangsu Jiangnan High Polymer FiberLtd and see how it has performed in the past by looking at this FREE detailed graph 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.