Declining Stock and Decent Financials: Is The Market Wrong About Jiu Zun Digital Interactive Entertainment Group Holdings Limited (HKG:1961)?

It is hard to get excited after looking at Jiu Zun Digital Interactive Entertainment Group Holdings' (HKG:1961) recent performance, when its stock has declined 23% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Jiu Zun Digital Interactive Entertainment Group Holdings' ROE in this article.

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.

Check out our latest analysis for Jiu Zun Digital Interactive Entertainment Group Holdings

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiu Zun Digital Interactive Entertainment Group Holdings is:

12% = CN¥29m ÷ CN¥241m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.12.

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.

A Side By Side comparison of Jiu Zun Digital Interactive Entertainment Group Holdings' Earnings Growth And 12% ROE

At first glance, Jiu Zun Digital Interactive Entertainment Group Holdings seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. For this reason, Jiu Zun Digital Interactive Entertainment Group Holdings' five year net income decline of 9.4% raises the question as to why the decent ROE didn't translate into growth. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared Jiu Zun Digital Interactive Entertainment Group Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 32% in the same period. This is quite worrisome.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Jiu Zun Digital Interactive Entertainment Group Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiu Zun Digital Interactive Entertainment Group Holdings Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 29% (or a retention ratio of 71%) which is pretty normal, Jiu Zun Digital Interactive Entertainment Group Holdings' 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, Jiu Zun Digital Interactive Entertainment Group Holdings started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Summary

Overall, we feel that Jiu Zun Digital Interactive Entertainment Group Holdings certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing 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. Our risks dashboard would have the 6 risks we have identified for Jiu Zun Digital Interactive Entertainment Group Holdings.

If you’re looking to trade Jiu Zun Digital Interactive Entertainment Group Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.