It is hard to get excited after looking at Jutze Intelligence TechnologyLtd's (SZSE:300802) recent performance, when its stock has declined 15% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Jutze Intelligence TechnologyLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Jutze Intelligence TechnologyLtd is:

6.6% = CN¥110m ÷ CN¥1.7b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Jutze Intelligence TechnologyLtd's Earnings Growth And 6.6% ROE

At first glance, Jutze Intelligence TechnologyLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.6%, we may spare it some thought. Even so, Jutze Intelligence TechnologyLtd has shown a fairly decent growth in its net income which grew at a rate of 8.0%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Jutze Intelligence TechnologyLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10.0% over the last few years.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Jutze Intelligence TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jutze Intelligence TechnologyLtd Using Its Retained Earnings Effectively?

Jutze Intelligence TechnologyLtd's three-year median payout ratio to shareholders is 25% (implying that it retains 75% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Jutze Intelligence TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

On the whole, we do feel that Jutze Intelligence TechnologyLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Jutze Intelligence 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.