It is hard to get excited after looking at Jiangshan Oupai Door Industry's (SHSE:603208) recent performance, when its stock has declined 18% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Jiangshan Oupai Door Industry's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jiangshan Oupai Door Industry

How Is ROE Calculated?

Return on equity 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 Jiangshan Oupai Door Industry is:

21% = CN¥410m ÷ CN¥1.9b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Jiangshan Oupai Door Industry's Earnings Growth And 21% ROE

To start with, Jiangshan Oupai Door Industry's ROE looks acceptable. On comparing with the average industry ROE of 9.5% the company's ROE looks pretty remarkable. Probably as a result of this, Jiangshan Oupai Door Industry was able to see an impressive net income growth of 33% over the last five years. However, there could also be other causes behind this growth. 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 Jiangshan Oupai Door Industry's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Jiangshan Oupai Door Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangshan Oupai Door Industry Making Efficient Use Of Its Profits?

Jiangshan Oupai Door Industry's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangshan Oupai Door Industry is reinvesting its earnings efficiently.

Additionally, Jiangshan Oupai Door Industry has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 37% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Jiangshan Oupai Door Industry'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.