It is hard to get excited after looking at Tianjin Ruixin TechnologyLtd's (SZSE:300828) recent performance, when its stock has declined 21% over the past month. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Tianjin Ruixin TechnologyLtd's ROE in this article.

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. 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 Tianjin Ruixin TechnologyLtd is:

6.9% = CN¥53m ÷ CN¥780m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. 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.

Tianjin Ruixin TechnologyLtd's Earnings Growth And 6.9% ROE

At first glance, Tianjin Ruixin TechnologyLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.5%, so we won't completely dismiss the company. We can see that Tianjin Ruixin TechnologyLtd has grown at a five year net income growth average rate of 3.7%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

We then compared Tianjin Ruixin TechnologyLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.8% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Tianjin Ruixin TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tianjin Ruixin TechnologyLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 58% (or a retention ratio of 42%), most of Tianjin Ruixin TechnologyLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Tianjin Ruixin TechnologyLtd has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Tianjin Ruixin TechnologyLtd. 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. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. You can see the 1 risk we have identified for Tianjin Ruixin TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.