Declining Stock and Decent Financials: Is The Market Wrong About Jing-Jan Retail Business Co., Ltd. (GTSM:2942)?

With its stock down 5.1% over the past month, it is easy to disregard Jing-Jan Retail Business (GTSM:2942). 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 Jing-Jan Retail Business' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Jing-Jan Retail Business

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Jing-Jan Retail Business is:

17% = NT$170m ÷ NT$1b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Jing-Jan Retail Business' Earnings Growth And 17% ROE

To begin with, Jing-Jan Retail Business seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.1%. However, we are curious as to how the high returns still resulted in flat growth for Jing-Jan Retail Business in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Jing-Jan Retail Business' net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 1.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Jing-Jan Retail Business''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jing-Jan Retail Business Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 79% (meaning, the company retains only 21% of profits) for Jing-Jan Retail Business suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Jing-Jan Retail Business only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Jing-Jan Retail Business has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Jing-Jan Retail Business' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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