Could The Market Be Wrong About Jiangsu Evergreen New Material Technology Incorporated Company (SHSE:603125) Given Its Attractive Financial Prospects?

With its stock down 6.5% over the past week, it is easy to disregard Jiangsu Evergreen New Material Technology (SHSE:603125). 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. In this article, we decided to focus on Jiangsu Evergreen New Material Technology'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Jiangsu Evergreen New Material Technology

How Is ROE Calculated?

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 Jiangsu Evergreen New Material Technology is:

8.9% = CN¥203m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Jiangsu Evergreen New Material Technology's Earnings Growth And 8.9% ROE

At first glance, Jiangsu Evergreen New Material Technology's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.2% doesn't go unnoticed by us. This probably goes some way in explaining Jiangsu Evergreen New Material Technology's moderate 16% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Jiangsu Evergreen New Material Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.9%.

Earnings growth is a huge factor in stock valuation. 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. 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 Evergreen New Material Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Evergreen New Material Technology Efficiently Re-investing Its Profits?

In Jiangsu Evergreen New Material Technology's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.2% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Jiangsu Evergreen New Material Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Jiangsu Evergreen New Material Technology'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Jiangsu Evergreen New Material Technology.

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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.