Most readers would already be aware that Tongling Jingda Special Magnet Wire's (SHSE:600577) stock increased significantly by 39% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Tongling Jingda Special Magnet Wire's ROE.

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 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 Tongling Jingda Special Magnet Wire is:

9.8% = CN¥546m ÷ CN¥5.6b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Tongling Jingda Special Magnet Wire's Earnings Growth And 9.8% ROE

On the face of it, Tongling Jingda Special Magnet Wire's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. Still, Tongling Jingda Special Magnet Wire has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay flat.

As a next step, we compared Tongling Jingda Special Magnet Wire'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 10% 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 Tongling Jingda Special Magnet Wire's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tongling Jingda Special Magnet Wire Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 60% (implying that the company keeps only 40% of its income) of its business to reinvest into its business), most of Tongling Jingda Special Magnet Wire's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Tongling Jingda Special Magnet Wire has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we have mixed feelings about Tongling Jingda Special Magnet Wire. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.