Nanjing TDH TechnologyLtd's (SZSE:301378) stock is up by a considerable 51% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Nanjing TDH TechnologyLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Nanjing TDH TechnologyLtd is:

3.8% = CN¥53m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).

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¥0.04 in profit.

What Has ROE Got To Do With 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.

Nanjing TDH TechnologyLtd's Earnings Growth And 3.8% ROE

As you can see, Nanjing TDH TechnologyLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 4.0% either. So we are actually pleased to see that Nanjing TDH TechnologyLtd's net income grew at an acceptable rate of 10.0% over the last five years. We reckon that there could also be other factors at play that are influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Nanjing TDH TechnologyLtd'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 4.8%.

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. Is Nanjing TDH TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanjing TDH TechnologyLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 50% (implying that the company retains 50% of its profits), it seems that Nanjing TDH TechnologyLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

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

Summary

Overall, we feel that Nanjing TDH TechnologyLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.