Is Jiangyin Zhongnan Heavy Industries Co.,Ltd's (SZSE:002445) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Jiangyin Zhongnan Heavy IndustriesLtd's (SZSE:002445) stock increased significantly by 40% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Jiangyin Zhongnan Heavy IndustriesLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Jiangyin Zhongnan Heavy IndustriesLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Jiangyin Zhongnan Heavy IndustriesLtd is:

1.8% = CN¥41m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Jiangyin Zhongnan Heavy IndustriesLtd's Earnings Growth And 1.8% ROE

As you can see, Jiangyin Zhongnan Heavy IndustriesLtd's ROE looks pretty weak. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. Despite this, surprisingly, Jiangyin Zhongnan Heavy IndustriesLtd saw an exceptional 61% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Jiangyin Zhongnan Heavy IndustriesLtd's growth is quite high when compared to the industry average growth of 9.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangyin Zhongnan Heavy IndustriesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangyin Zhongnan Heavy IndustriesLtd Making Efficient Use Of Its Profits?

Jiangyin Zhongnan Heavy IndustriesLtd doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that Jiangyin Zhongnan Heavy IndustriesLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Jiangyin Zhongnan Heavy IndustriesLtd visit our risks dashboard for free.

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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.