Nanjing COSMOS Chemical's (SZSE:300856) stock is up by a considerable 21% over the past three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Specifically, we decided to study Nanjing COSMOS Chemical'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Nanjing COSMOS Chemical is:

27% = CN¥793m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.27 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Nanjing COSMOS Chemical's Earnings Growth And 27% ROE

First thing first, we like that Nanjing COSMOS Chemical has an impressive ROE. Secondly, even when compared to the industry average of 6.7% the company's ROE is quite impressive. Under the circumstances, Nanjing COSMOS Chemical's considerable five year net income growth of 47% was to be expected.

Next, on comparing with the industry net income growth, we found that Nanjing COSMOS Chemical's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Nanjing COSMOS Chemical is trading on a high P/E or a low P/E, relative to its industry.

Is Nanjing COSMOS Chemical Making Efficient Use Of Its Profits?

Nanjing COSMOS Chemical has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Nanjing COSMOS Chemical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Nanjing COSMOS Chemical has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 25% of its profits over the next three years. Accordingly, forecasts suggest that Nanjing COSMOS Chemical's future ROE will be 28% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Nanjing COSMOS Chemical's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.