It is hard to get excited after looking at Jiangsu JieJie MicroelectronicsLtd's (SZSE:300623) recent performance, when its stock has declined 11% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Jiangsu JieJie MicroelectronicsLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Jiangsu JieJie MicroelectronicsLtd

How To Calculate Return On Equity?

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 JieJie MicroelectronicsLtd is:

12% = CN¥467m ÷ CN¥4.0b (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Jiangsu JieJie MicroelectronicsLtd's Earnings Growth And 12% ROE

At first glance, Jiangsu JieJie MicroelectronicsLtd seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.9%. Consequently, this likely laid the ground for the impressive net income growth of 30% seen over the past five years by Jiangsu JieJie MicroelectronicsLtd. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Jiangsu JieJie MicroelectronicsLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Jiangsu JieJie MicroelectronicsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu JieJie MicroelectronicsLtd Making Efficient Use Of Its Profits?

Jiangsu JieJie MicroelectronicsLtd has a really low three-year median payout ratio of 23%, meaning that it has the remaining 77% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Jiangsu JieJie MicroelectronicsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Conclusion

In total, we are pretty happy with Jiangsu JieJie MicroelectronicsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Jiangsu JieJie MicroelectronicsLtd.

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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.