Jiangsu Aisen Semiconductor Material Co.,Ltd.'s (SHSE:688720) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 21% over the past month, it is easy to disregard Jiangsu Aisen Semiconductor MaterialLtd (SHSE:688720). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Jiangsu Aisen Semiconductor MaterialLtd's ROE.

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.

Check out our latest analysis for Jiangsu Aisen Semiconductor MaterialLtd

How To 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 Jiangsu Aisen Semiconductor MaterialLtd is:

3.7% = CN¥38m ÷ CN¥1.0b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. 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.

Jiangsu Aisen Semiconductor MaterialLtd's Earnings Growth And 3.7% ROE

It is quite clear that Jiangsu Aisen Semiconductor MaterialLtd's ROE is rather low. Not just that, even compared to the industry average of 6.4%, the company's ROE is entirely unremarkable. Jiangsu Aisen Semiconductor MaterialLtd was still able to see a decent net income growth of 12% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Jiangsu Aisen Semiconductor MaterialLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangsu Aisen Semiconductor MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Aisen Semiconductor MaterialLtd Making Efficient Use Of Its Profits?

Jiangsu Aisen Semiconductor MaterialLtd has a three-year median payout ratio of 37%, which implies that it retains the remaining 63% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

While Jiangsu Aisen Semiconductor MaterialLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we do feel that Jiangsu Aisen Semiconductor MaterialLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. You can see the 2 risks we have identified for Jiangsu Aisen Semiconductor MaterialLtd by visiting our risks dashboard for free on our platform here.

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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.