With its stock down 14% over the past week, it is easy to disregard Nanchang Mineral Systems (SZSE:001360). 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. Particularly, we will be paying attention to Nanchang Mineral Systems' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Nanchang Mineral Systems is:
7.2% = CN¥102m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).
The 'return' is the profit 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¥0.07.
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. 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 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.
Nanchang Mineral Systems' Earnings Growth And 7.2% ROE
At first glance, Nanchang Mineral Systems' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Having said that, Nanchang Mineral Systems has shown a modest net income growth of 8.6% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Nanchang Mineral Systems' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.5% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Nanchang Mineral Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Nanchang Mineral Systems Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 45% (implying that the company retains 55% of its profits), it seems that Nanchang Mineral Systems is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Summary
Overall, we feel that Nanchang Mineral Systems certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 Nanchang Mineral Systems.
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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.