Is Aerospace Nanhu Electronic Information Technology Co., Ltd.'s (SHSE:688552) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at Aerospace Nanhu Electronic Information Technology's (SHSE:688552) recent performance, when its stock has declined 13% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Aerospace Nanhu Electronic Information Technology's ROE.

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.

View our latest analysis for Aerospace Nanhu Electronic Information Technology

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Aerospace Nanhu Electronic Information Technology is:

3.9% = CN¥103m ÷ CN¥2.7b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings 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 Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Aerospace Nanhu Electronic Information Technology's Earnings Growth And 3.9% ROE

It is quite clear that Aerospace Nanhu Electronic Information Technology's ROE is rather low. Even compared to the average industry ROE of 5.0%, the company's ROE is quite dismal. Therefore, Aerospace Nanhu Electronic Information Technology's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Aerospace Nanhu Electronic Information Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Aerospace Nanhu Electronic Information Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aerospace Nanhu Electronic Information Technology Efficiently Re-investing Its Profits?

Aerospace Nanhu Electronic Information Technology has a low three-year median payout ratio of 24% (or a retention ratio of 76%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Only recently, Aerospace Nanhu Electronic Information Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Aerospace Nanhu Electronic Information Technology's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

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