Hainan Jinpan Smart Technology (SHSE:688676) has had a rough three months with its share price down 23%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Hainan Jinpan Smart Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Hainan Jinpan Smart Technology is:

15% = CN¥508m ÷ CN¥3.4b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.15.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Hainan Jinpan Smart Technology's Earnings Growth And 15% ROE

At first glance, Hainan Jinpan Smart Technology seems to have a decent ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. This certainly adds some context to Hainan Jinpan Smart Technology's exceptional 22% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Hainan Jinpan Smart Technology's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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. Is 688676 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hainan Jinpan Smart Technology Using Its Retained Earnings Effectively?

The three-year median payout ratio for Hainan Jinpan Smart Technology is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Hainan Jinpan Smart Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Hainan Jinpan Smart Technology has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 32%. Still, forecasts suggest that Hainan Jinpan Smart Technology's future ROE will rise to 24% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Hainan Jinpan Smart Technology's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com