Are Strong Financial Prospects The Force That Is Driving The Momentum In Shandong Nanshan Fashion Sci-Tech Co., Ltd.'s SZSE:300918) Stock?

Most readers would already be aware that Shandong Nanshan Fashion Sci-Tech's (SZSE:300918) stock increased significantly by 11% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Shandong Nanshan Fashion Sci-Tech's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shandong Nanshan Fashion Sci-Tech

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shandong Nanshan Fashion Sci-Tech is:

9.9% = CN¥207m ÷ CN¥2.1b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shandong Nanshan Fashion Sci-Tech's Earnings Growth And 9.9% ROE

When you first look at it, Shandong Nanshan Fashion Sci-Tech's ROE doesn't look that attractive. 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. This certainly adds some context to Shandong Nanshan Fashion Sci-Tech's moderate 19% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. 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.

We then compared Shandong Nanshan Fashion Sci-Tech's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Shandong Nanshan Fashion Sci-Tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Nanshan Fashion Sci-Tech Using Its Retained Earnings Effectively?

Shandong Nanshan Fashion Sci-Tech has a three-year median payout ratio of 30%, which implies that it retains the remaining 70% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Shandong Nanshan Fashion Sci-Tech has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Shandong Nanshan Fashion Sci-Tech's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.