It is hard to get excited after looking at Ningbo Ocean Shipping's (SHSE:601022) recent performance, when its stock has declined 18% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Ningbo Ocean Shipping's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Ningbo Ocean Shipping is:

9.6% = CN¥513m ÷ CN¥5.3b (Based on the trailing twelve months to September 2023).

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¥0.10 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. 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.

Ningbo Ocean Shipping's Earnings Growth And 9.6% ROE

At first glance, Ningbo Ocean Shipping's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.7%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Ningbo Ocean Shipping's net income grew significantly at a rate of 24% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Ningbo Ocean Shipping's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Ningbo Ocean Shipping fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ningbo Ocean Shipping Efficiently Re-investing Its Profits?

Ningbo Ocean Shipping has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. So it seems that Ningbo Ocean Shipping is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Ningbo Ocean Shipping only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like Ningbo Ocean Shipping has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Ningbo Ocean Shipping.

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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.