Jilin OLED Material Tech Co., Ltd. (SHSE:688378) Stock's On A Decline: Are Poor Fundamentals The Cause?

It is hard to get excited after looking at Jilin OLED Material Tech's (SHSE:688378) recent performance, when its stock has declined 7.9% over the past week. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Jilin OLED Material Tech'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Jilin OLED Material Tech

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 Jilin OLED Material Tech is:

5.1% = CN¥90m ÷ CN¥1.8b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

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.

A Side By Side comparison of Jilin OLED Material Tech's Earnings Growth And 5.1% ROE

When you first look at it, Jilin OLED Material Tech's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.0%. Having said that, Jilin OLED Material Tech has shown a meagre net income growth of 2.7% over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing with the industry net income growth, we found that Jilin OLED Material Tech's reported growth was lower than the industry growth of 4.0% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Jilin OLED Material Tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jilin OLED Material Tech Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 95% (that is, the company retains only 5.2% of its income) over the past three years for Jilin OLED Material Tech suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Jilin OLED Material Tech has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 88%. Still, forecasts suggest that Jilin OLED Material Tech's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we would be extremely cautious before making any decision on Jilin OLED Material Tech. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.