Can mixed fundamentals negatively impact JiaChen Holding Group Limited (HKG: 1937) on current stock price dynamics?
JiaChen Holding Group (HKG: 1937) has had an excellent performance in the stock market with a significant increase in its shares of 467% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. Specifically, we decided to study the ROE of JiaChen Holding Group in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for JiaChen Holding Group
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of JiaChen Holding Group is:
2.5% = CN ¥ 7.1m CN ¥ 284m (Based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.02 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
JiaChen Holding Group Profit Growth and 2.5% ROE
As you can see, the ROE of JiaChen Holding Group seems quite low. Even compared to the industry average of 9.9%, the ROE figure is quite disappointing. Therefore, it may not be wrong to say that the 26% five-year drop in net profit seen by JiaChen Holding Group may have been the result of lower ROE. However, other factors can also lead to lower income. For example, the company has a very high payout ratio or faces competitive pressures.
That being said, we compared the performance of JiaChen Holding Group with that of the industry and became concerned when we found that although the company reduced its profits, the industry increased its profits at a rate of. 17% over the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. If you are wondering about the valuation of JiaChen Holding Group, check out this gauge of its price / earnings ratio, relative to its industry.
Is JiaChen Holding Group Efficiently Reinvesting Its Profits?
JiaChen Holding Group does not pay any dividends, which means that all of its profits are potentially reinvested in the company, which does not explain why the profits of the company have declined if it keeps all of its profits. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
Overall, we believe that the performance displayed by JiaChen Holding Group can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. Our risk dashboard would contain the 4 risks that we have identified for JiaChen Holding Group.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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