Jinan Acetate Chemical Co., Ltd.'s (TPE:4763) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Jinan Acetate Chemical (TPE:4763) has had a rough three months with its share price down 3.5%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Jinan Acetate Chemical's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jinan Acetate Chemical

How To Calculate Return On Equity?

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 Jinan Acetate Chemical is:

30% = NT$412m ÷ NT$1.4b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.30.

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. 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.

Jinan Acetate Chemical's Earnings Growth And 30% ROE

Firstly, we acknowledge that Jinan Acetate Chemical has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.7% which is quite remarkable. This probably laid the groundwork for Jinan Acetate Chemical's moderate 8.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Jinan Acetate Chemical's growth is quite high when compared to the industry average growth of 1.0% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Jinan Acetate Chemical is trading on a high P/E or a low P/E, relative to its industry.

Is Jinan Acetate Chemical Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 83% (or a retention ratio of 17%) for Jinan Acetate Chemical suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Jinan Acetate Chemical is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

In total, we are pretty happy with Jinan Acetate Chemical's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Jinan Acetate Chemical and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.
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