Jiangyin Jianghua Microelectronics Materials' (SHSE:603078) stock is up by a considerable 61% over the past three months. 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.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You Calculate Return On Equity?

Return on equity 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 Jiangyin Jianghua Microelectronics Materials is:

3.4% = CN¥64m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Jiangyin Jianghua Microelectronics Materials' Earnings Growth And 3.4% ROE

It is quite clear that Jiangyin Jianghua Microelectronics Materials' ROE is rather low. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Jiangyin Jianghua Microelectronics Materials grew its net income at a significant rate of 22% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. 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.

As a next step, we compared Jiangyin Jianghua Microelectronics Materials' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.9%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jiangyin Jianghua Microelectronics Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangyin Jianghua Microelectronics Materials Using Its Retained Earnings Effectively?

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. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

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

Summary

On the whole, we do feel that Jiangyin Jianghua Microelectronics Materials has some positive attributes. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.