Should Weakness in Nanchang Mineral Systems Co., Ltd.'s (SZSE:001360) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

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. Specifically, we decided to study Nanchang Mineral Systems' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Nanchang Mineral Systems

How Do You Calculate Return On Equity?

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 income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Nanchang Mineral Systems' Earnings Growth And 7.2% ROE

On the face of it, Nanchang Mineral Systems' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. On the other hand, Nanchang Mineral Systems reported a moderate 8.6% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Nanchang Mineral Systems' 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 9.5% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Nanchang Mineral Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanchang Mineral Systems Using Its Retained Earnings Effectively?

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.

Conclusion

On the whole, we do feel that Nanchang Mineral Systems has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. To know the 2 risks we have identified for Nanchang Mineral Systems visit our risks dashboard for free.

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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.