Shenzhen Jasic TechnologyLtd (SZSE:300193) has had a great run on the share market with its stock up by a significant 33% over the last 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. In this article, we decided to focus on Shenzhen Jasic TechnologyLtd's ROE.

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 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 Shenzhen Jasic TechnologyLtd is:

9.5% = CN¥217m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Shenzhen Jasic TechnologyLtd's Earnings Growth And 9.5% ROE

When you first look at it, Shenzhen Jasic TechnologyLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.3% doesn't go unnoticed by us. Having said that, Shenzhen Jasic TechnologyLtd's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Shenzhen Jasic 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 7.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Shenzhen Jasic TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Jasic TechnologyLtd Efficiently Re-investing Its Profits?

Shenzhen Jasic TechnologyLtd has a three-year median payout ratio as high as 116% meaning that the company is paying a dividend which is beyond its means. The absence of growth in Shenzhen Jasic TechnologyLtd's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. That's a huge risk in our books. You can see the 2 risks we have identified for Shenzhen Jasic TechnologyLtd by visiting our risks dashboard for free on our platform here.

Moreover, Shenzhen Jasic TechnologyLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, Shenzhen Jasic TechnologyLtd's performance is quite a big let-down. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Shenzhen Jasic TechnologyLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.