Jiangsu Pacific Quartz (SHSE:603688) has had a rough three months with its share price down 19%. 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. Specifically, we decided to study Jiangsu Pacific Quartz's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
ROE 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:
65% = CN¥4.7b ÷ CN¥7.2b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.65.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
Jiangsu Pacific Quartz's Earnings Growth And 65% ROE
Firstly, we acknowledge that Jiangsu Pacific Quartz has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.4% also doesn't go unnoticed by us. So, the substantial 73% net income growth seen by Jiangsu Pacific Quartz over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Jiangsu Pacific Quartz's growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jiangsu Pacific Quartz is trading on a high P/E or a low P/E, relative to its industry.
Is Jiangsu Pacific Quartz Using Its Retained Earnings Effectively?
Jiangsu Pacific Quartz's three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. By the looks of it, the dividend is well covered and Jiangsu Pacific Quartz is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Jiangsu Pacific Quartz is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.
Summary
Overall, we are quite pleased with Jiangsu Pacific Quartz's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.