Does The Market Have A Low Tolerance For Shanghai Jin Jiang Online Network Service Co., Ltd.'s (SHSE:600650) Mixed Fundamentals?

It is hard to get excited after looking at Shanghai Jin Jiang Online Network Service's (SHSE:600650) recent performance, when its stock has declined 9.6% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Shanghai Jin Jiang Online Network Service's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shanghai Jin Jiang Online Network Service

How Is ROE Calculated?

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 Shanghai Jin Jiang Online Network Service is:

4.6% = CN¥192m ÷ CN¥4.2b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.05 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. 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 Shanghai Jin Jiang Online Network Service's Earnings Growth And 4.6% ROE

It is quite clear that Shanghai Jin Jiang Online Network Service's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 4.4%. Thus, the low ROE provides some context to Shanghai Jin Jiang Online Network Service's flat net income growth over the past five years.

Next, we compared Shanghai Jin Jiang Online Network Service's performance against the industry and found that the industry shrunk its earnings at 2.6% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, This does appease the negative sentiment around the company to a certain extent.

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. Is Shanghai Jin Jiang Online Network Service fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Jin Jiang Online Network Service Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 30% (meaning the company retains70% of profits) in the last three-year period, Shanghai Jin Jiang Online Network Service's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Shanghai Jin Jiang Online Network Service has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Shanghai Jin Jiang Online Network Service's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Shanghai Jin Jiang Online Network Service 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.