Jiangsu United Water TechnologyLtd (SHSE:603291) has had a rough three months with its share price down 11%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Jiangsu United Water TechnologyLtd's ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Jiangsu United Water TechnologyLtd
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Jiangsu United Water TechnologyLtd is:
9.2% = CN¥156m ÷ CN¥1.7b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Jiangsu United Water TechnologyLtd's Earnings Growth And 9.2% ROE
On the face of it, Jiangsu United Water TechnologyLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.7%. We can see that Jiangsu United Water TechnologyLtd has grown at a five year net income growth average rate of 3.1%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.
As a next step, we compared Jiangsu United Water TechnologyLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.5% in the same period.
Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Jiangsu United Water TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangsu United Water TechnologyLtd Making Efficient Use Of Its Profits?
Jiangsu United Water TechnologyLtd's low three-year median payout ratio of 21% (or a retention ratio of 79%) should mean that the company is retaining most of its earnings to fuel its growth. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Only recently, Jiangsu United Water TechnologyLtd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.
Summary
In total, we're a bit ambivalent about Jiangsu United Water TechnologyLtd's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct.
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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.