Is Weakness In Shandong Jinjing Science & Technology Stock Co.,Ltd (SHSE:600586) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 11% over the past three months, it is easy to disregard Shandong Jinjing Science & Technology StockLtd (SHSE:600586). 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 Shandong Jinjing Science & Technology StockLtd'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 Shandong Jinjing Science & Technology StockLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shandong Jinjing Science & Technology StockLtd is:

9.1% = CN¥551m ÷ CN¥6.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Shandong Jinjing Science & Technology StockLtd's Earnings Growth And 9.1% ROE

On the face of it, Shandong Jinjing Science & Technology StockLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.5% which we definitely can't overlook. Even more so after seeing Shandong Jinjing Science & Technology StockLtd's exceptional 22% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

When you consider the fact that the industry earnings have shrunk at a rate of 2.1% in the same 5-year period, the company's net income growth is pretty remarkable.

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 Shandong Jinjing Science & Technology StockLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shandong Jinjing Science & Technology StockLtd Making Efficient Use Of Its Profits?

Shandong Jinjing Science & Technology StockLtd has a really low three-year median payout ratio of 17%, meaning that it has the remaining 83% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Shandong Jinjing Science & Technology StockLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

In total, we are pretty happy with Shandong Jinjing Science & Technology StockLtd's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com