Jiamei Food Packaging (Chuzhou)Ltd (SZSE:002969) has had a rough week with its share price down 14%. 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. Particularly, we will be paying attention to Jiamei Food Packaging (Chuzhou)Ltd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Jiamei Food Packaging (Chuzhou)Ltd is:

7.3% = CN¥170m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Jiamei Food Packaging (Chuzhou)Ltd's Earnings Growth And 7.3% ROE

When you first look at it, Jiamei Food Packaging (Chuzhou)Ltd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.4%, is definitely interesting. Still, Jiamei Food Packaging (Chuzhou)Ltd has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that Jiamei Food Packaging (Chuzhou)Ltd's growth figure is a bit better than the industry which has been shrinking at a rate of 0.005% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Jiamei Food Packaging (Chuzhou)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiamei Food Packaging (Chuzhou)Ltd Efficiently Re-investing Its Profits?

Jiamei Food Packaging (Chuzhou)Ltd's low three-year median payout ratio of 16%, (meaning the company retains84% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, Jiamei Food Packaging (Chuzhou)Ltd has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we are pretty happy with Jiamei Food Packaging (Chuzhou)Ltd's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Jiamei Food Packaging (Chuzhou)Ltd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.