With its stock down 12% over the past month, it is easy to disregard Jiangyin Zhongnan Heavy IndustriesLtd (SZSE:002445). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Jiangyin Zhongnan Heavy IndustriesLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Jiangyin Zhongnan Heavy IndustriesLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiangyin Zhongnan Heavy IndustriesLtd is:

3.8% = CN¥84m ÷ CN¥2.2b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 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. 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.

Jiangyin Zhongnan Heavy IndustriesLtd's Earnings Growth And 3.8% ROE

It is quite clear that Jiangyin Zhongnan Heavy IndustriesLtd's ROE is rather low. Not just that, even compared to the industry average of 5.1%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Jiangyin Zhongnan Heavy IndustriesLtd grew its net income at a significant rate of 53% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Jiangyin Zhongnan Heavy IndustriesLtd's growth is quite high when compared to the industry average growth of 15% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiangyin Zhongnan Heavy IndustriesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangyin Zhongnan Heavy IndustriesLtd Making Efficient Use Of Its Profits?

Jiangyin Zhongnan Heavy IndustriesLtd doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Jiangyin Zhongnan Heavy IndustriesLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Jiangyin Zhongnan Heavy IndustriesLtd visit our risks dashboard for free.

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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.