It is hard to get excited after looking at Shenzhen Jufei Optoelectronics' (SZSE:300303) recent performance, when its stock has declined 5.1% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Shenzhen Jufei Optoelectronics' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

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 Shenzhen Jufei Optoelectronics is:

8.6% = CN¥277m ÷ CN¥3.2b (Based on the trailing twelve months to September 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¥0.09 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.

Shenzhen Jufei Optoelectronics' Earnings Growth And 8.6% ROE

When you first look at it, Shenzhen Jufei Optoelectronics' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. But seeing Shenzhen Jufei Optoelectronics' five year net income decline of 6.5% over the past five years, we might rethink that. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Shenzhen Jufei Optoelectronics' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Shenzhen Jufei Optoelectronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen Jufei Optoelectronics Efficiently Re-investing Its Profits?

Shenzhen Jufei Optoelectronics has a high three-year median payout ratio of 55% (that is, it is retaining 45% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for Shenzhen Jufei Optoelectronics by visiting our risks dashboard for free on our platform here.

Moreover, Shenzhen Jufei Optoelectronics has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Shenzhen Jufei Optoelectronics. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Shenzhen Jufei Optoelectronics 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.