It is hard to get excited after looking at Kunming Chuan Jin Nuo Chemical's (SZSE:300505) recent performance, when its stock has declined 17% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company's financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Kunming Chuan Jin Nuo Chemical's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kunming Chuan Jin Nuo Chemical is:

5.2% = CN¥132m ÷ CN¥2.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Kunming Chuan Jin Nuo Chemical's Earnings Growth And 5.2% ROE

On the face of it, Kunming Chuan Jin Nuo Chemical's ROE is not much to talk about. Next, when compared to the average industry ROE of 7.6%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by Kunming Chuan Jin Nuo Chemical over the past five years could probably be the result of it having a lower ROE.

We then compared Kunming Chuan Jin Nuo Chemical's net income growth with the industry and found that the average industry growth rate was 2.5% in the same 5-year period.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kunming Chuan Jin Nuo Chemical is trading on a high P/E or a low P/E, relative to its industry.

Is Kunming Chuan Jin Nuo Chemical Efficiently Re-investing Its Profits?

Kunming Chuan Jin Nuo Chemical's low three-year median payout ratio of 9.3%, (meaning the company retains91% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Moreover, Kunming Chuan Jin Nuo Chemical has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Kunming Chuan Jin Nuo Chemical can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 Kunming Chuan Jin Nuo Chemical'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.