It is hard to get excited after looking at Jiangxi JDL Environmental Protection's (SHSE:688057) recent performance, when its stock has declined 7.5% over the past week. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Jiangxi JDL Environmental Protection's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Jiangxi JDL Environmental Protection

How To 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 Jiangxi JDL Environmental Protection is:

12% = CN¥389m ÷ CN¥3.3b (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Jiangxi JDL Environmental Protection's Earnings Growth And 12% ROE

To begin with, Jiangxi JDL Environmental Protection seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.2%. This certainly adds some context to Jiangxi JDL Environmental Protection's exceptional 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Jiangxi JDL Environmental Protection's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 688057 worth today? The intrinsic value infographic in our free research report helps visualize whether 688057 is currently mispriced by the market.

Is Jiangxi JDL Environmental Protection Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 56% (implying that it keeps only 44% of profits) for Jiangxi JDL Environmental Protection suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While Jiangxi JDL Environmental Protection has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we are quite pleased with Jiangxi JDL Environmental Protection's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Jiangxi JDL Environmental Protection 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.