With its stock down 26% over the past three months, it is easy to disregard Jiangsu Tongli Risheng Machinery (SHSE:605286). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Jiangsu Tongli Risheng Machinery's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Jiangsu Tongli Risheng Machinery is:

8.6% = CN¥179m ÷ CN¥2.1b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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 Tongli Risheng Machinery's Earnings Growth And 8.6% ROE

On the face of it, Jiangsu Tongli Risheng Machinery's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.5%, we may spare it some thought. Even so, Jiangsu Tongli Risheng Machinery has shown a fairly decent growth in its net income which grew at a rate of 7.3%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Jiangsu Tongli Risheng Machinery'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 11% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangsu Tongli Risheng Machinery's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Tongli Risheng Machinery Efficiently Re-investing Its Profits?

Jiangsu Tongli Risheng Machinery's three-year median payout ratio to shareholders is 13% (implying that it retains 87% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Jiangsu Tongli Risheng Machinery has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Jiangsu Tongli Risheng Machinery certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all.

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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.