Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd.'s (SHSE:600363) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's (SHSE:600363) stock is up by a considerable 102% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is:

8.1% = CN¥395m ÷ CN¥4.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 8.1% ROE

On the face of it, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.4% doesn't go unnoticed by us. This certainly adds some context to Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's moderate 10% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd Using Its Retained Earnings Effectively?

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has a low three-year median payout ratio of 9.6%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we do feel that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has some positive attributes. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.