Do Its Financials Have Any Role To Play In Driving Fujian Nanwang Environment Protection Scien-Tech Co.,Ltd's (SZSE:301355) Stock Up Recently?

Fujian Nanwang Environment Protection Scien-TechLtd (SZSE:301355) has had a great run on the share market with its stock up by a significant 13% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Fujian Nanwang Environment Protection Scien-TechLtd's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Fujian Nanwang Environment Protection Scien-TechLtd

How Do You Calculate Return On Equity?

ROE 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 Fujian Nanwang Environment Protection Scien-TechLtd is:

4.7% = CN¥73m ÷ CN¥1.5b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Is The Relationship Between ROE And 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. 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.

Fujian Nanwang Environment Protection Scien-TechLtd's Earnings Growth And 4.7% ROE

As you can see, Fujian Nanwang Environment Protection Scien-TechLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 5.6% either. However, the modest 6.1% net income growth seen by Fujian Nanwang Environment Protection Scien-TechLtd over the past five years is a positive sign. We reckon that there could also be other factors at play that are influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Fujian Nanwang Environment Protection Scien-TechLtd compares quite favourably to the industry average, which shows a decline of 0.2% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Fujian Nanwang Environment Protection Scien-TechLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fujian Nanwang Environment Protection Scien-TechLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Fujian Nanwang Environment Protection Scien-TechLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Fujian Nanwang Environment Protection Scien-TechLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that Fujian Nanwang Environment Protection Scien-TechLtd has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Fujian Nanwang Environment Protection Scien-TechLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com