Most readers would already be aware that Jiangsu Tongxingbao Intelligent Transportation Technology’s (SZSE:301339) stock increased significantly by 34% over the past month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Jiangsu Tongxingbao Intelligent Transportation Technology’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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Check out our latest analysis for Jiangsu Tongxingbao Intelligent Transportation Technology
How Do You 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 Tongxingbao Intelligent Transportation Technology is:
8.1% = CN¥217m ÷ CN¥2.7b (Based on the trailing twelve months to June 2024).
The ‘return’ is the amount earned after tax 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¥0.08 in profit.
What Is The Relationship Between ROE And 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 Tongxingbao Intelligent Transportation Technology’s Earnings Growth And 8.1% ROE
At first glance, Jiangsu Tongxingbao Intelligent Transportation Technology’s ROE doesn’t look very promising. However, the fact that the company’s ROE is higher than the average industry ROE of 6.5%, is definitely interesting. But seeing Jiangsu Tongxingbao Intelligent Transportation Technology’s five year net income decline of 12% over the past five years, we might rethink that. Remember, the company’s ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to shrink.
So, as a next step, we compared Jiangsu Tongxingbao Intelligent Transportation Technology’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 5.0% over the last few years.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Jiangsu Tongxingbao Intelligent Transportation Technology’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangsu Tongxingbao Intelligent Transportation Technology Using Its Retained Earnings Effectively?
In spite of a normal three-year median payout ratio of 41% (that is, a retention ratio of 59%), the fact that Jiangsu Tongxingbao Intelligent Transportation Technology’s earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Jiangsu Tongxingbao Intelligent Transportation Technology only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.
Summary
In total, it does look like Jiangsu Tongxingbao Intelligent Transportation Technology has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.
