Nanjing Develop Advanced Manufacturing Co., Ltd.'s (SHSE:688377) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Nanjing Develop Advanced Manufacturing's (SHSE:688377) stock increased significantly by 94% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Nanjing Develop Advanced Manufacturing's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Nanjing Develop Advanced Manufacturing

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 Develop Advanced Manufacturing is:

4.6% = CN¥82m ÷ CN¥1.8b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

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

Nanjing Develop Advanced Manufacturing's Earnings Growth And 4.6% ROE

It is quite clear that Nanjing Develop Advanced Manufacturing's ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Although, we can see that Nanjing Develop Advanced Manufacturing saw a modest net income growth of 12% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Nanjing Develop Advanced Manufacturing's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Nanjing Develop Advanced Manufacturing fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanjing Develop Advanced Manufacturing Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Nanjing Develop Advanced Manufacturing is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Nanjing Develop Advanced Manufacturing is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

In total, it does look like Nanjing Develop Advanced Manufacturing has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.