It is hard to get excited after looking at Jiangsu Sanfame Polyester MaterialLtd's (SHSE:600370) recent performance, when its stock has declined 14% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Jiangsu Sanfame Polyester MaterialLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Jiangsu Sanfame Polyester MaterialLtd is:

12% = CN¥861m ÷ CN¥6.9b (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.12 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Jiangsu Sanfame Polyester MaterialLtd's Earnings Growth And 12% ROE

To start with, Jiangsu Sanfame Polyester MaterialLtd's ROE looks acceptable. On comparing with the average industry ROE of 8.6% the company's ROE looks pretty remarkable. This probably laid the ground for Jiangsu Sanfame Polyester MaterialLtd's significant 45% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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 Jiangsu Sanfame Polyester MaterialLtd's growth is quite high when compared to the industry average growth of 4.2% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Jiangsu Sanfame Polyester MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Sanfame Polyester MaterialLtd Using Its Retained Earnings Effectively?

Jiangsu Sanfame Polyester MaterialLtd has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangsu Sanfame Polyester MaterialLtd is reinvesting its earnings efficiently.

Besides, Jiangsu Sanfame Polyester MaterialLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Jiangsu Sanfame Polyester MaterialLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 3 risks we have identified for Jiangsu Sanfame Polyester MaterialLtd.

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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.