It is hard to get excited after looking at Nanjing COSMOS Chemical's (SZSE:300856) recent performance, when its stock has declined 25% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Nanjing COSMOS Chemical's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

ROE 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 COSMOS Chemical is:

27% = CN¥793m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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¥0.27.

What Has ROE Got To Do With Earnings Growth?

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

Nanjing COSMOS Chemical's Earnings Growth And 27% ROE

First thing first, we like that Nanjing COSMOS Chemical has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.4% which is quite remarkable. Under the circumstances, Nanjing COSMOS Chemical's considerable five year net income growth of 47% was to be expected.

Next, on comparing with the industry net income growth, we found that Nanjing COSMOS Chemical's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

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

Is Nanjing COSMOS Chemical Efficiently Re-investing Its Profits?

Nanjing COSMOS Chemical's three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. By the looks of it, the dividend is well covered and Nanjing COSMOS Chemical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Nanjing COSMOS Chemical has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 25%. As a result, Nanjing COSMOS Chemical's ROE is not expected to change by much either, which we inferred from the analyst estimate of 27% for future ROE.

Conclusion

On the whole, we feel that Nanjing COSMOS Chemical's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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