Is Jiangsu Zhengdan Chemical Industry Co., Ltd.'s (SZSE:300641) Latest Stock Performance A Reflection Of Its Financial Health?

Jiangsu Zhengdan Chemical Industry's (SZSE:300641) stock is up by a considerable 14% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Jiangsu Zhengdan Chemical Industry's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangsu Zhengdan Chemical Industry

How Do You Calculate Return On Equity?

Return on equity 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 Jiangsu Zhengdan Chemical Industry is:

31% = CN¥808m ÷ CN¥2.6b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.31 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. 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 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 Jiangsu Zhengdan Chemical Industry's Earnings Growth And 31% ROE

First thing first, we like that Jiangsu Zhengdan Chemical Industry has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.2% also doesn't go unnoticed by us. So, the substantial 48% net income growth seen by Jiangsu Zhengdan Chemical Industry over the past five years isn't overly surprising.

As a next step, we compared Jiangsu Zhengdan Chemical Industry'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 an important metric to consider when valuing a stock. 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. What is 300641 worth today? The intrinsic value infographic in our free research report helps visualize whether 300641 is currently mispriced by the market.

Is Jiangsu Zhengdan Chemical Industry Using Its Retained Earnings Effectively?

Jiangsu Zhengdan Chemical Industry has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. So it seems that Jiangsu Zhengdan Chemical Industry is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Jiangsu Zhengdan Chemical Industry has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Jiangsu Zhengdan Chemical Industry's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 4 risks we have identified for Jiangsu Zhengdan Chemical Industry by visiting our risks dashboard for free on our platform here.

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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.