Jinsanjiang (Zhaoqing) Silicon Material (SZSE:301059) has had a great run on the share market with its stock up by a significant 44% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Jinsanjiang (Zhaoqing) Silicon Material's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material

How Is ROE Calculated?

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 Jinsanjiang (Zhaoqing) Silicon Material is:

9.4% = CN¥52m ÷ CN¥550m (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 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.

Jinsanjiang (Zhaoqing) Silicon Material's Earnings Growth And 9.4% ROE

At first glance, Jinsanjiang (Zhaoqing) Silicon Material's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 10%, we may spare it some thought. Having said that, Jinsanjiang (Zhaoqing) Silicon Material has shown a modest net income growth of 9.6% over the past five years. 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.

As a next step, we compared Jinsanjiang (Zhaoqing) Silicon Material's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

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. If you're wondering about Jinsanjiang (Zhaoqing) Silicon Material's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jinsanjiang (Zhaoqing) Silicon Material Making Efficient Use Of Its Profits?

Jinsanjiang (Zhaoqing) Silicon Material has a healthy combination of a moderate three-year median payout ratio of 50% (or a retention ratio of 50%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Summary

In total, it does look like Jinsanjiang (Zhaoqing) Silicon Material has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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. To know the 2 risks we have identified for Jinsanjiang (Zhaoqing) Silicon Material visit our risks dashboard for free.

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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.