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With its stock down 62% over the past three months, it is easy to disregard Jin Medical International (NASDAQ:ZJYL). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Jin Medical International's ROE.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Jin Medical International
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Jin Medical International is:
11% = US$2.8m ÷ US$26m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.
Why Is ROE Important For 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. 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.
Jin Medical International's Earnings Growth And 11% ROE
To start with, Jin Medical International's ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Jin Medical International saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that Jin Medical International's reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.
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 Jin Medical International's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.