It is hard to get excited after looking at Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's (SHSE:601952) recent performance, when its stock has declined 2.6% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd

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 Provincial Agricultural Reclamation and DevelopmentLtd is:

12% = CN¥776m ÷ CN¥6.6b (Based on the trailing twelve months to June 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¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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 Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Earnings Growth And 12% ROE

To begin with, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.9%. This certainly adds some context to Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's decent 7.8% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's growth is quite high when compared to the industry average growth of 5.0% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Provincial Agricultural Reclamation and DevelopmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd Using Its Retained Earnings Effectively?

Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has a three-year median payout ratio of 43%, which implies that it retains the remaining 57% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

In total, we are pretty happy with Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.