Jiangsu Zhengdan Chemical Industry Co., Ltd.'s (SZSE:300641) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Jiangsu Zhengdan Chemical Industry (SZSE:300641) has had a great run on the share market with its stock up by a significant 586% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Jiangsu Zhengdan Chemical Industry's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Jiangsu Zhengdan Chemical Industry

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 Zhengdan Chemical Industry is:

3.6% = CN¥57m ÷ CN¥1.6b (Based on the trailing twelve months to March 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¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Jiangsu Zhengdan Chemical Industry's Earnings Growth And 3.6% ROE

It is quite clear that Jiangsu Zhengdan Chemical Industry's ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. As a result, Jiangsu Zhengdan Chemical Industry's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Jiangsu Zhengdan Chemical Industry's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.1% in the same 5-year period, which is a bit concerning.

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. 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 Zhengdan Chemical Industry is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Zhengdan Chemical Industry Using Its Retained Earnings Effectively?

Jiangsu Zhengdan Chemical Industry's low three-year median payout ratio of 25% (implying that the company keeps75% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, Jiangsu Zhengdan Chemical Industry has been paying dividends over a period of seven 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 Zhengdan Chemical Industry. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Jiangsu Zhengdan Chemical Industry and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.