Most readers would already be aware that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's (SZSE:300826) stock increased significantly by 24% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROE in this article.

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.

How To Calculate Return On Equity?

Return on equity 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:

3.5% = CN¥46m ÷ CN¥1.3b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's Earnings Growth And 3.5% ROE

It is hard to argue that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 6.2%, the company's ROE is quite dismal. For this reason, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's five year net income decline of 8.2% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.07% in the same 5-year period, we still found NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 44% (that is, a retention ratio of 56%), the fact that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's earnings have shrunk is quite puzzling. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

On the whole, we feel that the performance shown by NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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. To know the 5 risks we have identified for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd visit our risks dashboard for free.

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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.

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