Nanjing Canatal Data-Centre Environmental Tech Co., Ltd's (SHSE:603912) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Nanjing Canatal Data-Centre Environmental Tech (SHSE:603912) has had a great run on the share market with its stock up by a significant 55% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Nanjing Canatal Data-Centre Environmental Tech'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

How To 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 Canatal Data-Centre Environmental Tech is:

1.5% = CN¥27m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.01.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Canatal Data-Centre Environmental Tech's Earnings Growth And 1.5% ROE

As you can see, Nanjing Canatal Data-Centre Environmental Tech's ROE looks pretty weak. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. For this reason, Nanjing Canatal Data-Centre Environmental Tech's five year net income decline of 26% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Nanjing Canatal Data-Centre Environmental Tech's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.3% in the same 5-year period.

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 Canatal Data-Centre Environmental Tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanjing Canatal Data-Centre Environmental Tech Efficiently Re-investing Its Profits?

Nanjing Canatal Data-Centre Environmental Tech's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 100% (or a retention ratio of -0.3%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Nanjing Canatal Data-Centre Environmental Tech visit our risks dashboard for free.

In addition, Nanjing Canatal Data-Centre Environmental Tech has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Nanjing Canatal Data-Centre Environmental Tech. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Nanjing Canatal Data-Centre Environmental Tech's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.