Beijing Jingyi Automation Equipment Co., Ltd.'s (SHSE:688652) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Beijing Jingyi Automation Equipment (SHSE:688652) has had a rough three months with its share price down 9.8%. 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 Beijing Jingyi Automation Equipment'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 Beijing Jingyi Automation Equipment

How To 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 Beijing Jingyi Automation Equipment is:

6.3% = CN¥123m ÷ CN¥2.0b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Beijing Jingyi Automation Equipment's Earnings Growth And 6.3% ROE

At first glance, Beijing Jingyi Automation Equipment's ROE doesn't look very promising. However, its ROE is similar to the industry average of 5.7%, so we won't completely dismiss the company. Looking at Beijing Jingyi Automation Equipment's exceptional 45% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Beijing Jingyi Automation Equipment's growth is quite high when compared to the industry average growth of 20% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Beijing Jingyi Automation Equipment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Beijing Jingyi Automation Equipment Making Efficient Use Of Its Profits?

Beijing Jingyi Automation Equipment has a really low three-year median payout ratio of 8.3%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Beijing Jingyi Automation Equipment is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Summary

In total, it does look like Beijing Jingyi Automation Equipment has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Beijing Jingyi Automation Equipment.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.