Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd.'s (SHSE:600363) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's (SHSE:600363) recent performance, when its stock has declined 18% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's ROE in this article.

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 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is:

8.9% = CN¥421m ÷ CN¥4.7b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's Earnings Growth And 8.9% ROE

At first glance, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.1% doesn't go unnoticed by us. This certainly adds some context to Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's moderate 9.2% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's reported growth was lower than the industry growth of 18% over the last few years, which is not something we like to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd Making Efficient Use Of Its Profits?

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's three-year median payout ratio to shareholders is 8.9% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has some positive aspects to its business. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.