Is Jiangsu Liance Electromechanical Technology Co., Ltd.'s (SHSE:688113) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Jiangsu Liance Electromechanical Technology's (SHSE:688113) stock increased significantly by 16% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Jiangsu Liance Electromechanical Technology's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangsu Liance Electromechanical Technology

How Is ROE Calculated?

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 Liance Electromechanical Technology is:

9.8% = CN¥90m ÷ CN¥925m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Liance Electromechanical Technology's Earnings Growth And 9.8% ROE

On the face of it, Jiangsu Liance Electromechanical Technology's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. This probably goes some way in explaining Jiangsu Liance Electromechanical Technology's moderate 5.3% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Jiangsu Liance Electromechanical Technology's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Jiangsu Liance Electromechanical Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Liance Electromechanical Technology Using Its Retained Earnings Effectively?

In Jiangsu Liance Electromechanical Technology's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

Besides, Jiangsu Liance Electromechanical Technology has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Jiangsu Liance Electromechanical Technology's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Jiangsu Liance Electromechanical Technology 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.