Jiangsu LiXing General Steel BallLtd (SZSE:300421) has had a rough three months with its share price down 12%. Given that stock prices are usually driven by a company's fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Jiangsu LiXing General Steel BallLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

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 LiXing General Steel BallLtd is:

4.7% = CN¥60m ÷ CN¥1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Jiangsu LiXing General Steel BallLtd's Earnings Growth And 4.7% ROE

It is hard to argue that Jiangsu LiXing General Steel BallLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 8.3%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Jiangsu LiXing General Steel BallLtd's very little net income growth of 5.0% over the past five years.

We then compared Jiangsu LiXing General Steel BallLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Jiangsu LiXing General Steel BallLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu LiXing General Steel BallLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 59% (or a retention ratio of 41%), most of Jiangsu LiXing General Steel BallLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Jiangsu LiXing General Steel BallLtd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Jiangsu LiXing General Steel BallLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 2 risks we have identified for Jiangsu LiXing General Steel BallLtd.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.