Jiang Su Suyan JingshenLtd (SHSE:603299) has had a great run on the share market with its stock up by a significant 28% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Jiang Su Suyan JingshenLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Jiang Su Suyan JingshenLtd is:

12% = CN¥759m ÷ CN¥6.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

Why Is ROE Important For 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 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.

Jiang Su Suyan JingshenLtd's Earnings Growth And 12% ROE

To begin with, Jiang Su Suyan JingshenLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.2%. Probably as a result of this, Jiang Su Suyan JingshenLtd was able to see an impressive net income growth of 32% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Jiang Su Suyan JingshenLtd's growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jiang Su Suyan JingshenLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiang Su Suyan JingshenLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Jiang Su Suyan JingshenLtd is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Jiang Su Suyan JingshenLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Jiang Su Suyan JingshenLtd has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Jiang Su Suyan JingshenLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Jiang Su Suyan JingshenLtd.

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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.