With its stock down 30% over the past three months, it is easy to disregard Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Nantong Jiangshan Agrochemical & ChemicalsLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd

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 Nantong Jiangshan Agrochemical & ChemicalsLtd is:

12% = CN¥431m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Nantong Jiangshan Agrochemical & ChemicalsLtd's Earnings Growth And 12% ROE

At first glance, Nantong Jiangshan Agrochemical & ChemicalsLtd seems to have a decent ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. This certainly adds some context to Nantong Jiangshan Agrochemical & ChemicalsLtd's exceptional 32% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Nantong Jiangshan Agrochemical & ChemicalsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Nantong Jiangshan Agrochemical & ChemicalsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Nantong Jiangshan Agrochemical & ChemicalsLtd Making Efficient Use Of Its Profits?

Nantong Jiangshan Agrochemical & ChemicalsLtd's significant three-year median payout ratio of 73% (where it is retaining only 27% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Nantong Jiangshan Agrochemical & ChemicalsLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Nantong Jiangshan Agrochemical & ChemicalsLtd's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.