Most readers would already be aware that Jiangsu Zhengdan Chemical Industry's (SZSE:300641) stock increased significantly by 27% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Jiangsu Zhengdan Chemical Industry's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To 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 Jiangsu Zhengdan Chemical Industry is:

31% = CN¥808m ÷ CN¥2.6b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.31 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. 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. 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.

Jiangsu Zhengdan Chemical Industry's Earnings Growth And 31% ROE

Firstly, we acknowledge that Jiangsu Zhengdan Chemical Industry has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.2% which is quite remarkable. Under the circumstances, Jiangsu Zhengdan Chemical Industry's considerable five year net income growth of 48% was to be expected.

We then compared Jiangsu Zhengdan Chemical Industry's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Jiangsu Zhengdan Chemical Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Zhengdan Chemical Industry Efficiently Re-investing Its Profits?

Jiangsu Zhengdan Chemical Industry's three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company is retaining 75% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Jiangsu Zhengdan Chemical Industry is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

In total, we are pretty happy with Jiangsu Zhengdan Chemical Industry's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 3 risks we have identified for Jiangsu Zhengdan Chemical Industry 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.