With its stock down 14% over the past three months, it is easy to disregard Jiangsu Leadmicro Nano-Equipment Technology (SHSE:688147). 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. Specifically, we decided to study Jiangsu Leadmicro Nano-Equipment Technology's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Jiangsu Leadmicro Nano-Equipment Technology
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 Jiangsu Leadmicro Nano-Equipment Technology is:
8.0% = CN¥162m ÷ CN¥2.0b (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Leadmicro Nano-Equipment Technology's Earnings Growth And 8.0% ROE
When you first look at it, Jiangsu Leadmicro Nano-Equipment Technology's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.6% doesn't go unnoticed by us. Particularly, the substantial 29% net income growth seen by Jiangsu Leadmicro Nano-Equipment Technology over the past five years is impressive . 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. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing Jiangsu Leadmicro Nano-Equipment Technology's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 29% over the last few years.
Earnings growth is a huge factor in stock valuation. 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. Is Jiangsu Leadmicro Nano-Equipment Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Jiangsu Leadmicro Nano-Equipment Technology Making Efficient Use Of Its Profits?
Given that Jiangsu Leadmicro Nano-Equipment Technology doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
On the whole, we feel that Jiangsu Leadmicro Nano-Equipment Technology's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.