It is hard to get excited after looking at Ningbo Tuopu GroupLtd's (SHSE:601689) recent performance, when its stock has declined 12% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Ningbo Tuopu GroupLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

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 Tuopu GroupLtd is:

14% = CN¥2.5b ÷ CN¥18b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.14 in profit.

What Is The Relationship Between ROE And 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 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 Ningbo Tuopu GroupLtd's Earnings Growth And 14% ROE

To start with, Ningbo Tuopu GroupLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.4%. This certainly adds some context to Ningbo Tuopu GroupLtd's exceptional 36% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

As a next step, we compared Ningbo Tuopu GroupLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.9%.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Ningbo Tuopu GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ningbo Tuopu GroupLtd Efficiently Re-investing Its Profits?

Ningbo Tuopu GroupLtd's three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company is retaining 75% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Ningbo Tuopu GroupLtd has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. Regardless, the future ROE for Ningbo Tuopu GroupLtd is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that Ningbo Tuopu GroupLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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