Declining Stock and Decent Financials: Is The Market Wrong About Academy of Environmental Planning and Design, Co.,Ltd. Nanjing University (SZSE:300864)?

Simply Wall St · Mar 17, 2023 01:08

With its stock down 10% over the past week, it is easy to disregard Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Academy of Environmental Planning and DesignLtd. Nanjing University'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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

How Do You Calculate Return On Equity?

The formula for return on equity is:

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¥125m ÷ CN¥1.2b (Based on the trailing twelve months to September 2022).

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¥0.11.

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. 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

When you first look at it, Academy of Environmental Planning and DesignLtd. Nanjing University's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.1%, is definitely interesting. This probably goes some way in explaining Academy of Environmental Planning and DesignLtd. Nanjing University's moderate 11% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Academy of Environmental Planning and DesignLtd. Nanjing University's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.9% in the same period.

past-earnings-growth — SZSE:300864 Past Earnings Growth March 17th 2023

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Making Efficient Use Of Its Profits?

While Academy of Environmental Planning and DesignLtd. Nanjing University has a three-year median payout ratio of 53% (which means it retains 47% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Along with seeing a growth in earnings, Academy of Environmental Planning and DesignLtd. Nanjing University only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like Academy of Environmental Planning and DesignLtd. Nanjing University has some positive aspects to its business. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. You can do your own research on Academy of Environmental Planning and DesignLtd. Nanjing University and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.