Guizhou Sanli PharmaceuticalLtd (SHSE:603439) has had a rough three months with its share price down 22%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Guizhou Sanli PharmaceuticalLtd's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
ROE 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 Guizhou Sanli PharmaceuticalLtd is:
18% = CN¥254m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.18 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
Guizhou Sanli PharmaceuticalLtd's Earnings Growth And 18% ROE
To begin with, Guizhou Sanli PharmaceuticalLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.2%. This certainly adds some context to Guizhou Sanli PharmaceuticalLtd's decent 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Guizhou Sanli PharmaceuticalLtd's growth is quite high when compared to the industry average growth of 11% 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. What is 603439 worth today? The intrinsic value infographic in our free research report helps visualize whether 603439 is currently mispriced by the market.
Is Guizhou Sanli PharmaceuticalLtd Making Efficient Use Of Its Profits?
Guizhou Sanli PharmaceuticalLtd has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% 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, Guizhou Sanli PharmaceuticalLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
In total, we are pretty happy with Guizhou Sanli PharmaceuticalLtd'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. 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 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. 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.