Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864) has had a rough three months with its share price down 23%. 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 Academy of Environmental Planning and DesignLtd. Nanjing University'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Academy of Environmental Planning and DesignLtd. Nanjing University is:

12% = CN¥148m ÷ CN¥1.2b (Based on the trailing twelve months to September 2023).

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¥0.12 in profit.

What Is The Relationship Between ROE And 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 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.

Academy of Environmental Planning and DesignLtd. Nanjing University's Earnings Growth And 12% ROE

To begin with, Academy of Environmental Planning and DesignLtd. Nanjing University seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.1%. Probably as a result of this, Academy of Environmental Planning and DesignLtd. Nanjing University was able to see a decent growth of 7.1% over the last five years.

Next, on comparing Academy of Environmental Planning and DesignLtd. Nanjing University's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.0% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Academy of Environmental Planning and DesignLtd. Nanjing University's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

While Academy of Environmental Planning and DesignLtd. Nanjing University has a three-year median payout ratio of 64% (which means it retains 36% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Academy of Environmental Planning and DesignLtd. Nanjing University has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Academy of Environmental Planning and DesignLtd. Nanjing University'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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Academy of Environmental Planning and DesignLtd. Nanjing University's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.