Most readers would already be aware that Jiangsu Xinri E-Vehicle's (SHSE:603787) stock increased significantly by 54% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Jiangsu Xinri E-Vehicle's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiangsu Xinri E-Vehicle is:

4.5% = CN¥71m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

Why Is ROE Important For 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.

Jiangsu Xinri E-Vehicle's Earnings Growth And 4.5% ROE

It is quite clear that Jiangsu Xinri E-Vehicle's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 5.4%. So we are actually pleased to see that Jiangsu Xinri E-Vehicle's net income grew at an acceptable rate of 9.3% over the last five years. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. 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 Jiangsu Xinri E-Vehicle's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangsu Xinri E-Vehicle fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Xinri E-Vehicle Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Jiangsu Xinri E-Vehicle suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Jiangsu Xinri E-Vehicle has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we have mixed feelings about Jiangsu Xinri E-Vehicle. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Jiangsu Xinri E-Vehicle's past profit growth, check out this visualization 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.