Academy of Environmental Planning and DesignLtd. Nanjing University's (SZSE:300864) stock is up by a considerable 28% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Academy of Environmental Planning and DesignLtd. Nanjing University's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Academy of Environmental Planning and DesignLtd. Nanjing University

How Do You 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 Academy of Environmental Planning and DesignLtd. Nanjing University is:

9.4% = CN¥111m ÷ CN¥1.2b (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Academy of Environmental Planning and DesignLtd. Nanjing University's Earnings Growth And 9.4% ROE

On the face of it, Academy of Environmental Planning and DesignLtd. Nanjing University's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.8% which we definitely can't overlook. This probably goes some way in explaining Academy of Environmental Planning and DesignLtd. Nanjing University's moderate 15% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Academy of Environmental Planning and DesignLtd. Nanjing University's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Academy of Environmental Planning and DesignLtd. Nanjing University is trading on a high P/E or a low P/E, relative to its industry.

Is Academy of Environmental Planning and DesignLtd. Nanjing University Efficiently Re-investing Its Profits?

Academy of Environmental Planning and DesignLtd. Nanjing University has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Along with seeing a growth in earnings, Academy of Environmental Planning and DesignLtd. Nanjing University only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we are quite pleased with Academy of Environmental Planning and DesignLtd. Nanjing University's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Academy of Environmental Planning and DesignLtd. Nanjing University.

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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.