Nantong Jiangshan Agrochemical & ChemicalsLtd's (SHSE:600389) stock is up by a considerable 38% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Nantong Jiangshan Agrochemical & ChemicalsLtd's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd
How Is ROE Calculated?
The formula for ROE 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:
44% = CN¥1.4b ÷ CN¥3.1b (Based on the trailing twelve months to March 2022).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.44 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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 44% ROE
To begin with, Nantong Jiangshan Agrochemical & ChemicalsLtd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, Nantong Jiangshan Agrochemical & ChemicalsLtd's considerable five year net income growth of 30% was to be expected.
Next, on comparing with the industry net income growth, we found that Nantong Jiangshan Agrochemical & ChemicalsLtd's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.SHSE:600389 Past Earnings Growth July 4th 2022
Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Using Its Retained Earnings Effectively?
Nantong Jiangshan Agrochemical & ChemicalsLtd has a significant three-year median payout ratio of 73%, meaning the company only retains 27% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Moreover, Nantong Jiangshan Agrochemical & ChemicalsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.
In total, we are pretty happy with Nantong Jiangshan Agrochemical & ChemicalsLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.