Nine Dragons Paper (Holdings) Limited's (HKG:2689) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Nine Dragons Paper (Holdings)'s (HKG:2689) stock is up by a considerable 15% over the past 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 Nine Dragons Paper (Holdings)'s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Nine Dragons Paper (Holdings)

How Is ROE Calculated?

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 Nine Dragons Paper (Holdings) is:

10% = CN¥4.2b ÷ CN¥41b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.10 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Nine Dragons Paper (Holdings)'s Earnings Growth And 10% ROE

At first glance, Nine Dragons Paper (Holdings) seems to have a decent ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. This certainly adds some context to Nine Dragons Paper (Holdings)'s exceptional 21% net income growth seen over the past five years. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Nine Dragons Paper (Holdings)'s growth is quite high when compared to the industry average growth of 8.9% in the same period, which is great to see.

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. Has the market priced in the future outlook for 2689? You can find out in our latest intrinsic value infographic research report.

Is Nine Dragons Paper (Holdings) Using Its Retained Earnings Effectively?

The three-year median payout ratio for Nine Dragons Paper (Holdings) is 34%, which is moderately low. The company is retaining the remaining 66%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Nine Dragons Paper (Holdings) is reinvesting its earnings efficiently.

Besides, Nine Dragons Paper (Holdings) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. However, Nine Dragons Paper (Holdings)'s ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Nine Dragons Paper (Holdings)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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.
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