Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864) has had a great run on the share market with its stock up by a significant 22% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate 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 key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

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 Academy of Environmental Planning and DesignLtd. Nanjing University is:

11% = CN¥137m ÷ CN¥1.3b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Academy of Environmental Planning and DesignLtd. Nanjing University's Earnings Growth And 11% ROE

At first glance, Academy of Environmental Planning and DesignLtd. Nanjing University's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.7%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 5.4% seen over the past five years by Academy of Environmental Planning and DesignLtd. Nanjing University. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Academy of Environmental Planning and DesignLtd. Nanjing University's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 significant three-year median payout ratio of 65%, meaning that it is left with only 35% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Academy of Environmental Planning and DesignLtd. Nanjing University has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, it does look like Academy of Environmental Planning and DesignLtd. Nanjing University has some positive aspects to its business. True, the company has posted a respectable growth in earnings. However, the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paying out less dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. 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.

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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.