Shanghai Jin Jiang Online Network Service Co., Ltd.'s (SHSE:600650) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Shanghai Jin Jiang Online Network Service (SHSE:600650) has had a great run on the share market with its stock up by a significant 57% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Shanghai Jin Jiang Online Network Service's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shanghai Jin Jiang Online Network Service

How Do You Calculate Return On Equity?

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 Shanghai Jin Jiang Online Network Service is:

4.7% = CN¥196m ÷ CN¥4.2b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. 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?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Shanghai Jin Jiang Online Network Service's Earnings Growth And 4.7% ROE

It is quite clear that Shanghai Jin Jiang Online Network Service's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 4.6% either. Given the low ROE Shanghai Jin Jiang Online Network Service's five year net income decline of 2.2% is not surprising.

We then compared Shanghai Jin Jiang Online Network Service'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 3.2% in the same 5-year period. This does offer shareholders some relief

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 28% (where it is retaining 72% of its profits), Shanghai Jin Jiang Online Network Service has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, Shanghai Jin Jiang Online Network Service has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Shanghai Jin Jiang Online Network Service. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for Shanghai Jin Jiang Online Network Service visit our risks dashboard for free.

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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.