Is Zhengzhou Jiean Hi-Tech Co.,Ltd.'s (SZSE:300845) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at Zhengzhou Jiean Hi-TechLtd's (SZSE:300845) recent performance, when its stock has declined 22% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Zhengzhou Jiean Hi-TechLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Zhengzhou Jiean Hi-TechLtd

How Is ROE Calculated?

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 Zhengzhou Jiean Hi-TechLtd is:

6.8% = CN¥53m ÷ CN¥789m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 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. 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. 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.

Zhengzhou Jiean Hi-TechLtd's Earnings Growth And 6.8% ROE

At first glance, Zhengzhou Jiean Hi-TechLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 4.5% doesn't go unnoticed by us. But seeing Zhengzhou Jiean Hi-TechLtd's five year net income decline of 12% over the past five years, we might rethink that. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared Zhengzhou Jiean Hi-TechLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.1% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Zhengzhou Jiean Hi-TechLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhengzhou Jiean Hi-TechLtd Using Its Retained Earnings Effectively?

Zhengzhou Jiean Hi-TechLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 56% (or a retention ratio of 44%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Zhengzhou Jiean Hi-TechLtd visit our risks dashboard for free.

Moreover, Zhengzhou Jiean Hi-TechLtd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

On the whole, we feel that the performance shown by Zhengzhou Jiean Hi-TechLtd can be open to many interpretations. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Zhengzhou Jiean Hi-TechLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.