With its stock down 14% over the past week, it is easy to disregard Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Zhongjie (Jiangsu) 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Zhongjie (Jiangsu) TechnologyLtd

How To 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 Zhongjie (Jiangsu) TechnologyLtd is:

5.3% = CN¥41m ÷ CN¥787m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Zhongjie (Jiangsu) TechnologyLtd's Earnings Growth And 5.3% ROE

It is quite clear that Zhongjie (Jiangsu) TechnologyLtd's ROE is rather low. Not just that, even compared to the industry average of 7.0%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Zhongjie (Jiangsu) TechnologyLtd over the past five years could probably be the result of it having a lower ROE.

We then compared Zhongjie (Jiangsu) TechnologyLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 0.6% 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. 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 Zhongjie (Jiangsu) TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhongjie (Jiangsu) TechnologyLtd Efficiently Re-investing Its Profits?

Zhongjie (Jiangsu) TechnologyLtd has a low three-year median payout ratio of 9.3% (or a retention ratio of 91%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Summary

In total, it does look like Zhongjie (Jiangsu) TechnologyLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Zhongjie (Jiangsu) TechnologyLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.