The Jinda Technology Co., Ltd. (SHSE:603211) share price has risen by 13% over the past week. However, the company’s key financial metrics seem to be diverging across the board, raising doubts about whether the current share price momentum can be sustained. In this article, we decided to focus on Jinda Technology’s ROE.
Return on equity (ROE) is a key indicator used to assess how efficiently a company’s management is utilizing its capital. Simply put, ROE tells you the profit each dollar of shareholder investment generates.
Read our latest analysis for Jintuo Technology
How is ROE calculated?
ROE can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, Jintuo Technology’s ROE is:
4.5% = CNY 53m / CNY 1.2b (Based on the trailing twelve months to March 2024).
“Revenue” is the income a company has earned over the past year – one way to conceptualize this is that for each RMB1 of shareholders’ equity, the company made RMB0.04 in profit.
What is the relationship between ROE and profit growth?
Thus far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are able to assess a company’s earnings growth potential. Generally speaking, all else being equal, companies with higher return on equity and retained profits will have higher growth rates than companies that don’t share these attributes.
KingTuo Technology’s profit growth and 4.5% ROE
It’s hard to argue that Jinda’s ROE is very good on its own. Not only that, but compared to the industry average of 7.4%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that Jinda’s 8.5% five-year decline in net income is due to its low ROE. However, there may also be other factors contributing to the decline in profits, such as low earnings retention and poor capital allocation.
That being said, when we compared Jintuo Technology’s performance with the industry, we were concerned to see that the company’s revenue has been shrinking, while the wider industry has seen its revenue grow by 11% over the same five-year period.
SHSE:603211 Historical Revenue Growth July 30, 2024
Earnings growth is a big driver of stock valuation. Investors need to see if the expected growth or decline in earnings, in either case, is priced into the price. This helps them determine if the stock is poised for a bright or bleak future. Is Jintuo Technology fairly valued relative to other companies? The following three valuation metrics may help you decide:
Is Jinda Technology making effective use of its retained earnings?
The fact that Jintuo Technology’s earnings are shrinking, despite a typical three-year median payout ratio of 31% (i.e. a retention ratio of 69%), is very puzzling, so there may be other explanations for this – for example, the company’s business may be deteriorating.
Just recently, Jintuo Technology announced a dividend payment, suggesting that management may have decided that shareholders have a strong preference for dividends.
Conclusion
Overall, we feel that Jintuo Technology’s performance is open to various interpretations. Although the company has a high reinvestment rate, its low ROE means that the reinvestment is not benefiting investors, negatively impacting earnings growth. In summary, we should proceed with caution with this company, and one way to do this is to look at the risk profile of the business. Our risks dashboard shows 1 risk we have identified for Jintuo Technology.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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