Jiangsu General Science Technology (SHSE:601500) has had a rough week with its share price down 7.2%. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. Particularly, we will be paying attention to Jiangsu General Science 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Jiangsu General Science Technology
How Is ROE Calculated?
ROE 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 General Science Technology is:
7.3% = CN¥438m ÷ CN¥6.0b (Based on the trailing twelve months to September 2024).
The ‘return’ is the income the business earned 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¥0.07 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. 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 General Science Technology’s Earnings Growth And 7.3% ROE
When you first look at it, Jiangsu General Science Technology’s ROE doesn’t look that attractive. However, given that the company’s ROE is similar to the average industry ROE of 8.3%, we may spare it some thought. Particularly, the exceptional 39% net income growth seen by Jiangsu General Science Technology over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Jiangsu General Science Technology’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 9.2% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Jiangsu General Science Technology’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangsu General Science Technology Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 99% (implying that it keeps only 0.9% of profits) for Jiangsu General Science Technology suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
Moreover, Jiangsu General Science Technology is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Summary
In total, we’re a bit ambivalent about Jiangsu General Science Technology’s performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
