Are Strong Financial Prospects The Force That Is Driving The Momentum In Naipu Mining Machinery Co., Ltd.'s SZSE:300818) Stock?

Most readers would already be aware that Naipu Mining Machinery's (SZSE:300818) stock increased significantly by 33% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Naipu Mining Machinery's ROE today.

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 Naipu Mining Machinery

How Is ROE Calculated?

Return on equity 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 Naipu Mining Machinery is:

9.9% = CN¥136m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Naipu Mining Machinery's Earnings Growth And 9.9% ROE

On the face of it, Naipu Mining Machinery's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.9% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Naipu Mining Machinery. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Naipu Mining Machinery'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 9.6%.

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. What is 300818 worth today? The intrinsic value infographic in our free research report helps visualize whether 300818 is currently mispriced by the market.

Is Naipu Mining Machinery Using Its Retained Earnings Effectively?

In Naipu Mining Machinery's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 21% (or a retention ratio of 79%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Naipu Mining Machinery is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

Overall, we are quite pleased with Naipu Mining Machinery's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.