It is hard to get excited after looking at Jiangsu Tongguang Electronic Wire & Cable's (SZSE:300265) recent performance, when its stock has declined 35% over the past three months. 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 Jiangsu Tongguang Electronic Wire & Cable's ROE in this article.

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.

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 Jiangsu Tongguang Electronic Wire & Cable is:

5.9% = CN¥135m ÷ CN¥2.3b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Jiangsu Tongguang Electronic Wire & Cable's Earnings Growth And 5.9% ROE

On the face of it, Jiangsu Tongguang Electronic Wire & Cable's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.2%, so we won't completely dismiss the company. Particularly, the exceptional 28% net income growth seen by Jiangsu Tongguang Electronic Wire & Cable over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then compared Jiangsu Tongguang Electronic Wire & Cable'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 14% in the same 5-year 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. Is Jiangsu Tongguang Electronic Wire & Cable fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Tongguang Electronic Wire & Cable Using Its Retained Earnings Effectively?

Jiangsu Tongguang Electronic Wire & Cable has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Jiangsu Tongguang Electronic Wire & Cable has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Jiangsu Tongguang Electronic Wire & Cable has some positive attributes. 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. 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. You can see the 2 risks we have identified for Jiangsu Tongguang Electronic Wire & Cable by visiting our risks dashboard for free on our platform here.

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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.