In this commentary, I will examine Jiangnan Group Limited’s (HKG:1366) latest earnings update (31 December 2017) and compare these figures against its performance over the past couple of years, as well as how the rest of the electrical industry performed. As an investor, I find it beneficial to assess 1366’s trend over the short-to-medium term in order to gauge whether or not the company is able to meet its goals, and ultimately sustainably grow over time. Check out our latest analysis for Jiangnan Group
Was 1366’s recent earnings decline indicative of a tough track record?
1366’s trailing twelve-month earnings (from 31 December 2017) of HK$103.91m has more than halved from HK$531.32m in the prior year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 2.48%, indicating the rate at which 1366 is growing has slowed down. What could be happening here? Let’s examine what’s going on with margins and whether the whole industry is experiencing the hit as well.
Revenue growth over the last few years, has been positive, however, earnings growth has failed to keep up meaning Jiangnan Group has been ramping up its expenses by a lot more. This harms margins and earnings, and is not a sustainable practice. Inspecting growth from a sector-level, the HK electrical industry has been growing, albeit, at a muted single-digit rate of 3.73% in the previous year, and 4.29% over the past half a decade. This means any recent headwind the industry is enduring, it’s hitting Jiangnan Group harder than its peers.
In terms of returns from investment, Jiangnan Group has not invested its equity funds well, leading to a 1.96% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 2.35% is below the HK Electrical industry of 6.11%, indicating Jiangnan Group’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Jiangnan Group’s debt level, has declined over the past 3 years from 22.91% to 2.72%.
What does this mean?
While past data is useful, it doesn’t tell the whole story. In some cases, companies that endure an extended period of decline in earnings are undergoing some sort of reinvestment phase Though if the entire industry is struggling to grow over time, it may be a signal of a structural shift, which makes Jiangnan Group and its peers a higher risk investment. You should continue to research Jiangnan Group to get a better picture of the stock by looking at: