NanJing Research Institute of Surveying, Mapping & Geotechnical Investigation, Co.Ltd's (SZSE:300826) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Simply Wall St · Nov 8, 2023 18:55

NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's (SZSE:300826) stock is up by a considerable 39% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd'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.

See our latest analysis for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd is:

5.4% = CN¥67m ÷ CN¥1.2b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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. 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 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.

NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's Earnings Growth And 5.4% ROE

On the face of it, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 6.8%. Therefore, it might not be wrong to say that the five year net income decline of 4.5% seen by NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

That being said, we compared NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 2.9% in the same 5-year period.

past-earnings-growth — SZSE:300826 Past Earnings Growth November 8th 2023

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd is trading on a high P/E or a low P/E, relative to its industry.

Is NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 49% (that is, a retention ratio of 51%), the fact that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Summary

Overall, we have mixed feelings about NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd.

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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.