Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd.'s (SZSE:301421) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (SZSE:301421) has had a great run on the share market with its stock up by a significant 15% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd

How Is ROE Calculated?

Return on equity 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 Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is:

3.5% = CN¥42m ÷ CN¥1.2b (Based on the trailing twelve months to September 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¥0.04 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. 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 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.

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's Earnings Growth And 3.5% ROE

As you can see, Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's ROE looks pretty weak. Even compared to the average industry ROE of 6.2%, the company's ROE is quite dismal. However, the moderate 14% net income growth seen by Nanjing Wavelength Opto-Electronic Science & TechnologyLtd over the past five years is definitely a positive. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.9%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nanjing Wavelength Opto-Electronic Science & TechnologyLtd Making Efficient Use Of Its Profits?

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has a significant three-year median payout ratio of 71%, meaning that it is left with only 29% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we feel that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd certainly does have some positive factors to consider. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.