Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) has had a great run on the share market with its stock up by a significant 32% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Jiangsu Maixinlin Aviation Science and Technology's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

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 Maixinlin Aviation Science and Technology is:

4.3% = CN¥30m ÷ CN¥702m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Maixinlin Aviation Science and Technology's Earnings Growth And 4.3% ROE

As you can see, Jiangsu Maixinlin Aviation Science and Technology's ROE looks pretty weak. Not just that, even compared to the industry average of 5.8%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 2.8% seen by Jiangsu Maixinlin Aviation Science and Technology over the past five years could probably be the result of it having a lower ROE.

We then compared Jiangsu Maixinlin Aviation Science and Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Jiangsu Maixinlin Aviation Science and Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Maixinlin Aviation Science and Technology Using Its Retained Earnings Effectively?

Jiangsu Maixinlin Aviation Science and Technology has a three-year median payout ratio of 84% (implying that it keeps only 16% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Jiangsu Maixinlin Aviation Science and Technology. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. You can see the 4 risks we have identified for Jiangsu Maixinlin Aviation Science and Technology by visiting our risks dashboard for free on our platform here.

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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.