With its stock down 8.2% over the past month, it is easy to disregard Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd (SHSE:600363). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd'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.

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 Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd is:

8.0% = CN¥358m ÷ CN¥4.5b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's Earnings Growth And 8.0% ROE

On the face of it, Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.2%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 8.6% seen over the past five years by Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's reported growth was lower than the industry growth of 26% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd Using Its Retained Earnings Effectively?

In Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.9% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd has some positive attributes. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. 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 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.