Most readers would already be aware that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's (SHSE:600363) stock increased significantly by 79% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is:

8.1% = CN¥395m ÷ CN¥4.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. 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. 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.

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's Earnings Growth And 8.1% ROE

When you first look at it, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. This certainly adds some context to Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's moderate 10% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd Making Efficient Use Of Its Profits?

In Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.6% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Besides, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has some positive attributes. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.