Ningbo Jianan Electronics Co.,Ltd's (SZSE:300880) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Ningbo Jianan ElectronicsLtd (SZSE:300880) has had a great run on the share market with its stock up by a significant 38% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Ningbo Jianan ElectronicsLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Ningbo Jianan ElectronicsLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Ningbo Jianan ElectronicsLtd is:

20% = CN¥218m ÷ CN¥1.1b (Based on the trailing twelve months to September 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¥0.20.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Ningbo Jianan ElectronicsLtd's Earnings Growth And 20% ROE

To begin with, Ningbo Jianan ElectronicsLtd seems to have a respectable ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. This probably laid the ground for Ningbo Jianan ElectronicsLtd's significant 23% net income growth seen over the past five years. We believe that there might also 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 with the industry net income growth, we found that Ningbo Jianan ElectronicsLtd's growth is quite high when compared to the industry average growth of 3.9% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 300880 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ningbo Jianan ElectronicsLtd Making Efficient Use Of Its Profits?

Ningbo Jianan ElectronicsLtd has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. So it seems that Ningbo Jianan ElectronicsLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

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

Conclusion

In total, we are pretty happy with Ningbo Jianan ElectronicsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Ningbo Jianan ElectronicsLtd.

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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.