Stock Analysis

NanJing Research Institute of Surveying, Mapping & Geotechnical Investigation, Co.Ltd's (SZSE:300826) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

SZSE:300826
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NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd (SZSE:300826) has had a great run on the share market with its stock up by a significant 36% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd

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 NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd is:

3.6% = CN¥48m ÷ CN¥1.3b (Based on the trailing twelve months to September 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¥0.04 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's Earnings Growth And 3.6% ROE

It is hard to argue that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 6.6%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 11% seen by NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd'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 3.5% in the same 5-year period.

past-earnings-growth
SZSE:300826 Past Earnings Growth December 30th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 41% (that is, a retention ratio of 59%), the fact that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

On the whole, we feel that the performance shown by NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd 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.