Most readers would already be aware that Jiangyin Jianghua Microelectronics Materials' (SHSE:603078) stock increased significantly by 8.7% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Jiangyin Jianghua Microelectronics Materials' 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.

How Is ROE Calculated?

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 Jiangyin Jianghua Microelectronics Materials is:

3.6% = CN¥68m ÷ CN¥1.9b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For 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 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.

Jiangyin Jianghua Microelectronics Materials' Earnings Growth And 3.6% ROE

It is hard to argue that Jiangyin Jianghua Microelectronics Materials' ROE is much good in and of itself. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. In spite of this, Jiangyin Jianghua Microelectronics Materials was able to grow its net income considerably, at a rate of 26% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Jiangyin Jianghua Microelectronics Materials' 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 7.8% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is 603078 worth today? The intrinsic value infographic in our free research report helps visualize whether 603078 is currently mispriced by the market.

Is Jiangyin Jianghua Microelectronics Materials Efficiently Re-investing Its Profits?

Jiangyin Jianghua Microelectronics Materials has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Jiangyin Jianghua Microelectronics Materials has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Jiangyin Jianghua Microelectronics Materials certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.