Jiangsu Maixinlin Aviation Science and Technology's (SHSE:688685) stock is up by a considerable 38% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Jiangsu Maixinlin Aviation Science and Technology's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

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 Maixinlin Aviation Science and Technology is:

4.9% = CN¥37m ÷ CN¥761m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Jiangsu Maixinlin Aviation Science and Technology's Earnings Growth And 4.9% ROE

At first glance, Jiangsu Maixinlin Aviation Science and Technology's ROE doesn't look very promising. However, its ROE is similar to the industry average of 5.0%, so we won't completely dismiss the company. But then again, Jiangsu Maixinlin Aviation Science and Technology's five year net income shrunk at a rate of 16%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

However, when we compared Jiangsu Maixinlin Aviation Science and Technology's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 13% in the same period. This is quite worrisome.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Jiangsu Maixinlin Aviation Science and Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Maixinlin Aviation Science and Technology Using Its Retained Earnings Effectively?

Jiangsu Maixinlin Aviation Science and Technology's 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 67% (or a retention ratio of 33%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Jiangsu Maixinlin Aviation Science and Technology by visiting our risks dashboard for free on our platform here.

Only recently, Jiangsu Maixinlin Aviation Science and Technology stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Conclusion

On the whole, Jiangsu Maixinlin Aviation Science and Technology's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. You can do your own research on Jiangsu Maixinlin Aviation Science and Technology 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.