Jinsanjiang (Zhaoqing) Silicon Material's (SZSE:301059) stock is up by a considerable 42% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Jinsanjiang (Zhaoqing) Silicon Material's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material

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 Jinsanjiang (Zhaoqing) Silicon Material is:

12% = CN¥66m ÷ CN¥571m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings 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.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 12% ROE

To begin with, Jinsanjiang (Zhaoqing) Silicon Material seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 9.7%. Consequently, this likely laid the ground for the decent growth of 8.0% seen over the past five years by Jinsanjiang (Zhaoqing) Silicon Material.

We then compared Jinsanjiang (Zhaoqing) Silicon Material's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 20% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Jinsanjiang (Zhaoqing) Silicon Material is trading on a high P/E or a low P/E, relative to its industry.

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

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Jinsanjiang (Zhaoqing) Silicon Material suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Along with seeing a growth in earnings, Jinsanjiang (Zhaoqing) Silicon Material only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, it does look like Jinsanjiang (Zhaoqing) Silicon Material has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Jinsanjiang (Zhaoqing) Silicon Material's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.