It is hard to get excited after looking at Jiangsu Pacific Quartz's (SHSE:603688) recent performance, when its stock has declined 7.1% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Jiangsu Pacific Quartz's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Jiangsu Pacific Quartz
How To Calculate Return On Equity?
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 Jiangsu Pacific Quartz is:
24% = CN¥679m ÷ CN¥2.8b (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.24 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. 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 Jiangsu Pacific Quartz's Earnings Growth And 24% ROE
To begin with, Jiangsu Pacific Quartz has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.9% which is quite remarkable. Under the circumstances, Jiangsu Pacific Quartz's considerable five year net income growth of 31% was to be expected.
Next, on comparing Jiangsu Pacific Quartz's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Jiangsu Pacific Quartz's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangsu Pacific Quartz Using Its Retained Earnings Effectively?
Jiangsu Pacific Quartz has a three-year median payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangsu Pacific Quartz is reinvesting its earnings efficiently.
Moreover, Jiangsu Pacific Quartz is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. However, Jiangsu Pacific Quartz's ROE is predicted to rise to 48% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with Jiangsu Pacific Quartz's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.