Most readers would already be aware that Sichuan Joyou Digital TechnologiesLtd's (SZSE:301172) stock increased significantly by 28% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Sichuan Joyou Digital TechnologiesLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Sichuan Joyou Digital TechnologiesLtd is:

3.8% = CN¥55m ÷ CN¥1.4b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Sichuan Joyou Digital TechnologiesLtd's Earnings Growth And 3.8% ROE

It is quite clear that Sichuan Joyou Digital TechnologiesLtd's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 4.3%. Thus, the low ROE certainly provides some context to Sichuan Joyou Digital TechnologiesLtd's very little net income growth of 4.6% seen over the past five years.

Next, on comparing with the industry net income growth, we found that Sichuan Joyou Digital TechnologiesLtd's growth is quite high when compared to the industry average growth of 2.7% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Sichuan Joyou Digital TechnologiesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sichuan Joyou Digital TechnologiesLtd Using Its Retained Earnings Effectively?

Sichuan Joyou Digital TechnologiesLtd has a three-year median payout ratio of 53% (implying that it keeps only 47% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Only recently, Sichuan Joyou Digital TechnologiesLtd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Sichuan Joyou Digital TechnologiesLtd has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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. You can see the 2 risks we have identified for Sichuan Joyou Digital TechnologiesLtd by visiting our risks dashboard for free on our platform here.

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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.