Ningbo Ligong Environment And Energy TechnologyLtd's (SZSE:002322) stock up by 6.7% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to Ningbo Ligong Environment And Energy TechnologyLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Ningbo Ligong Environment And Energy TechnologyLtd is:

8.4% = CN¥270m ÷ CN¥3.2b (Based on the trailing twelve months to March 2024).

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¥0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Ningbo Ligong Environment And Energy TechnologyLtd's Earnings Growth And 8.4% ROE

At first glance, Ningbo Ligong Environment And Energy TechnologyLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.9% doesn't go unnoticed by us. But then again, seeing that Ningbo Ligong Environment And Energy TechnologyLtd's net income shrunk at a rate of 12% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared Ningbo Ligong Environment And Energy TechnologyLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 12% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Ningbo Ligong Environment And Energy TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Ligong Environment And Energy TechnologyLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio as high as 105%,Ningbo Ligong Environment And Energy TechnologyLtd's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. To know the 2 risks we have identified for Ningbo Ligong Environment And Energy TechnologyLtd visit our risks dashboard for free.

In addition, Ningbo Ligong Environment And Energy TechnologyLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Ningbo Ligong Environment And Energy TechnologyLtd. While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on Ningbo Ligong Environment And Energy TechnologyLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.

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