Zhangzhou Pientzehuang Pharmaceutical's (SHSE:600436) stock is up by a considerable 15% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Zhangzhou Pientzehuang Pharmaceutical's ROE in this article.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
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 Zhangzhou Pientzehuang Pharmaceutical is:
21% = CN¥2.8b ÷ CN¥14b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.21.
Why Is ROE Important For 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 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.
Zhangzhou Pientzehuang Pharmaceutical's Earnings Growth And 21% ROE
To begin with, Zhangzhou Pientzehuang Pharmaceutical seems to have a respectable ROE. On comparing with the average industry ROE of 8.5% the company's ROE looks pretty remarkable. This certainly adds some context to Zhangzhou Pientzehuang Pharmaceutical's decent 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Zhangzhou Pientzehuang Pharmaceutical's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 600436? You can find out in our latest intrinsic value infographic research report.
Is Zhangzhou Pientzehuang Pharmaceutical Using Its Retained Earnings Effectively?
Zhangzhou Pientzehuang Pharmaceutical has a three-year median payout ratio of 29%, which implies that it retains the remaining 71% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Besides, Zhangzhou Pientzehuang Pharmaceutical 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 26%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.
Conclusion
In total, we are pretty happy with Zhangzhou Pientzehuang Pharmaceutical's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.