Most readers would already be aware that Jiangsu Xiechang Electronic Technology Group's (SZSE:301418) stock increased significantly by 18% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Jiangsu Xiechang Electronic Technology Group's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

ROE 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 Jiangsu Xiechang Electronic Technology Group is:

4.9% = CN¥80m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Has ROE Got To Do With 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 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.

Jiangsu Xiechang Electronic Technology Group's Earnings Growth And 4.9% ROE

On the face of it, Jiangsu Xiechang Electronic Technology Group's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 6.9%. Hence, the flat earnings seen by Jiangsu Xiechang Electronic Technology Group over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Jiangsu Xiechang Electronic Technology Group's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Jiangsu Xiechang Electronic Technology Group is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Xiechang Electronic Technology Group Using Its Retained Earnings Effectively?

Jiangsu Xiechang Electronic Technology Group has a low three-year median payout ratio of 19% (or a retention ratio of 81%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Summary

On the whole, we feel that the performance shown by Jiangsu Xiechang Electronic Technology Group can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Jiangsu Xiechang Electronic Technology Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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