Sichuan Jiuyuan Yinhai Software.Co.,Ltd's (SZSE:002777) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Most readers would already be aware that Sichuan Jiuyuan Yinhai Software.Co.Ltd's (SZSE:002777) stock increased significantly by 41% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Sichuan Jiuyuan Yinhai Software.Co.Ltd's ROE.

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.

View our latest analysis for Sichuan Jiuyuan Yinhai Software.Co.Ltd

How To Calculate Return On Equity?

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 Sichuan Jiuyuan Yinhai Software.Co.Ltd is:

4.5% = CN¥79m ÷ CN¥1.8b (Based on the trailing twelve months to September 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¥0.04 in profit.

Why Is ROE Important For 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.

Sichuan Jiuyuan Yinhai Software.Co.Ltd's Earnings Growth And 4.5% ROE

As you can see, Sichuan Jiuyuan Yinhai Software.Co.Ltd's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 4.5%. Given the low ROE Sichuan Jiuyuan Yinhai Software.Co.Ltd's five year net income decline of 3.7% is not surprising.

However, when we compared Sichuan Jiuyuan Yinhai Software.Co.Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.1% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Sichuan Jiuyuan Yinhai Software.Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Sichuan Jiuyuan Yinhai Software.Co.Ltd Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 28% (or a retention ratio of 72%) which is pretty normal, Sichuan Jiuyuan Yinhai Software.Co.Ltd's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Sichuan Jiuyuan Yinhai Software.Co.Ltd has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

Overall, we have mixed feelings about Sichuan Jiuyuan Yinhai Software.Co.Ltd. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.