Is Jinsanjiang (Zhaoqing) Silicon Material Company Limited's (SZSE:301059) Stock On A Downtrend As A Result Of Its Poor Financials?

Jinsanjiang (Zhaoqing) Silicon Material (SZSE:301059) has had a rough month with its share price down 20%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Jinsanjiang (Zhaoqing) Silicon Material's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material

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 Jinsanjiang (Zhaoqing) Silicon Material is:

6.0% = CN¥34m ÷ CN¥570m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

What Is The Relationship Between ROE And 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. 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 Jinsanjiang (Zhaoqing) Silicon Material's Earnings Growth And 6.0% ROE

When you first look at it, Jinsanjiang (Zhaoqing) Silicon Material's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. But then again, Jinsanjiang (Zhaoqing) Silicon Material's five year net income shrunk at a rate of 9.3%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

That being said, we compared Jinsanjiang (Zhaoqing) Silicon Material's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.8% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Jinsanjiang (Zhaoqing) Silicon Material fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jinsanjiang (Zhaoqing) Silicon Material Making Efficient Use Of Its Profits?

Jinsanjiang (Zhaoqing) Silicon Material's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 55% (or a retention ratio of 45%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 4 risks we have identified for Jinsanjiang (Zhaoqing) Silicon Material.

In addition, Jinsanjiang (Zhaoqing) Silicon Material only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

Overall, we would be extremely cautious before making any decision on Jinsanjiang (Zhaoqing) Silicon Material. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Jinsanjiang (Zhaoqing) Silicon Material's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.