Stock Analysis

Are Zhejiang Jiemei Electronic And Technology Co., Ltd.'s (SZSE:002859) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

SZSE:002859
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With its stock down 10% over the past three months, it is easy to disregard Zhejiang Jiemei Electronic And Technology (SZSE:002859). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Zhejiang Jiemei Electronic And Technology's ROE in this article.

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.

See our latest analysis for Zhejiang Jiemei Electronic And Technology

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 Zhejiang Jiemei Electronic And Technology is:

8.6% = CN¥256m ÷ CN¥3.0b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made 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. 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.

Zhejiang Jiemei Electronic And Technology's Earnings Growth And 8.6% ROE

When you first look at it, Zhejiang Jiemei Electronic And Technology's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.6%, is definitely interesting. Having said that, Zhejiang Jiemei Electronic And Technology's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

We then compared Zhejiang Jiemei Electronic And Technology's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 0.2% in the same 5-year period. While this is not particularly good, its not particularly bad either.

past-earnings-growth
SZSE:002859 Past Earnings Growth May 29th 2024

Earnings growth is a huge factor in stock valuation. 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 Zhejiang Jiemei Electronic And Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Jiemei Electronic And Technology Efficiently Re-investing Its Profits?

Zhejiang Jiemei Electronic And Technology's low three-year median payout ratio of 25%, (meaning the company retains75% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, Zhejiang Jiemei Electronic And Technology has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Zhejiang Jiemei Electronic And Technology certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're here to simplify it.

Discover if Zhejiang Jiemei Electronic And Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.