Nisun International Enterprise Development Group Co., Ltd's (NASDAQ:NISN) Stock Is Going Strong: Have Financials A Role To Play?

Nisun International Enterprise Development Group's (NASDAQ:NISN) stock is up by a considerable 17% over the past three months. 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. Specifically, we decided to study Nisun International Enterprise Development Group's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Nisun International Enterprise Development Group

How To 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 Nisun International Enterprise Development Group is:

12% = US$7.2m ÷ US$60m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.12 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. 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 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.

Nisun International Enterprise Development Group's Earnings Growth And 12% ROE

To start with, Nisun International Enterprise Development Group's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. As you might expect, the 18% net income decline reported by Nisun International Enterprise Development Group is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared Nisun International Enterprise Development Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.9% in the same period. This is quite worrisome.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Nisun International Enterprise Development Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nisun International Enterprise Development Group Efficiently Re-investing Its Profits?

Summary

On the whole, we do feel that Nisun International Enterprise Development Group has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Nisun International Enterprise Development Group by visiting our risks dashboard for free on our platform here.

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