It is hard to get excited after looking at Jiangxi Guoguang Commercial Chains' (SHSE:605188) recent performance, when its stock has declined 20% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Jiangxi Guoguang Commercial Chains' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Jiangxi Guoguang Commercial Chains is:
1.2% = CN¥14m ÷ CN¥1.1b (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.01 in profit.
What Is The Relationship Between ROE And 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 Jiangxi Guoguang Commercial Chains' Earnings Growth And 1.2% ROE
As you can see, Jiangxi Guoguang Commercial Chains' ROE looks pretty weak. Not just that, even compared to the industry average of 7.0%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 56% seen by Jiangxi Guoguang Commercial Chains was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
So, as a next step, we compared Jiangxi Guoguang Commercial Chains' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.2% over the last few years.
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. 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 Guoguang Commercial Chains''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangxi Guoguang Commercial Chains Using Its Retained Earnings Effectively?
Jiangxi Guoguang Commercial Chains' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 50% (or a retention ratio of 50%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Jiangxi Guoguang Commercial Chains visit our risks dashboard for free.
Additionally, Jiangxi Guoguang Commercial Chains has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.
Conclusion
Overall, we have mixed feelings about Jiangxi Guoguang Commercial Chains. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Jiangxi Guoguang Commercial Chains and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.