Jiangxi Guoke Defence GroupLtd (SHSE:688543) has had a great run on the share market with its stock up by a significant 38% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Jiangxi Guoke Defence GroupLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Jiangxi Guoke Defence GroupLtd is:

9.1% = CN¥205m ÷ CN¥2.2b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated 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 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.

Jiangxi Guoke Defence GroupLtd's Earnings Growth And 9.1% ROE

On the face of it, Jiangxi Guoke Defence GroupLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.0% which we definitely can't overlook. Especially when you consider Jiangxi Guoke Defence GroupLtd's exceptional 28% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Jiangxi Guoke Defence GroupLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Jiangxi Guoke Defence GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangxi Guoke Defence GroupLtd Making Efficient Use Of Its Profits?

Jiangxi Guoke Defence GroupLtd has a significant three-year median payout ratio of 66%, meaning the company only retains 34% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Along with seeing a growth in earnings, Jiangxi Guoke Defence GroupLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 70% of its profits over the next three years. Accordingly, forecasts suggest that Jiangxi Guoke Defence GroupLtd's future ROE will be 11% which is again, similar to the current ROE.

Conclusion

Overall, we feel that Jiangxi Guoke Defence GroupLtd certainly does have some positive factors to consider. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.