Jiangsu Wujin Stainless Steel Pipe Group CO.,LTD.'s (SHSE:603878) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Most readers would already be aware that Jiangsu Wujin Stainless Steel Pipe GroupLTD's (SHSE:603878) stock increased significantly by 21% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Jiangsu Wujin Stainless Steel Pipe GroupLTD's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Jiangsu Wujin Stainless Steel Pipe GroupLTD

How To 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 Jiangsu Wujin Stainless Steel Pipe GroupLTD is:

9.3% = CN¥249m ÷ CN¥2.7b (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.

Why Is ROE Important For 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. 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 Wujin Stainless Steel Pipe GroupLTD's Earnings Growth And 9.3% ROE

At first glance, Jiangsu Wujin Stainless Steel Pipe GroupLTD's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.5%, is definitely interesting. Yet, Jiangsu Wujin Stainless Steel Pipe GroupLTD has posted measly growth of 2.9% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Jiangsu Wujin Stainless Steel Pipe GroupLTD's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.8% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Jiangsu Wujin Stainless Steel Pipe GroupLTD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Wujin Stainless Steel Pipe GroupLTD Using Its Retained Earnings Effectively?

Jiangsu Wujin Stainless Steel Pipe GroupLTD has a three-year median payout ratio of 68% (implying that it keeps only 32% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Jiangsu Wujin Stainless Steel Pipe GroupLTD has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we have mixed feelings about Jiangsu Wujin Stainless Steel Pipe GroupLTD. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.