Most readers would already be aware that Beijing Wantai Biological Pharmacy Enterprise's (SHSE:603392) stock increased significantly by 26% 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. Particularly, we will be paying attention to Beijing Wantai Biological Pharmacy Enterprise'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You 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 Beijing Wantai Biological Pharmacy Enterprise is:
1.0% = CN¥124m ÷ CN¥13b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.01 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Beijing Wantai Biological Pharmacy Enterprise's Earnings Growth And 1.0% ROE
It is hard to argue that Beijing Wantai Biological Pharmacy Enterprise's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.9%, the company's ROE is entirely unremarkable. In spite of this, Beijing Wantai Biological Pharmacy Enterprise was able to grow its net income considerably, at a rate of 39% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Beijing Wantai Biological Pharmacy Enterprise'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 12%.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Beijing Wantai Biological Pharmacy Enterprise fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Beijing Wantai Biological Pharmacy Enterprise Efficiently Re-investing Its Profits?
Beijing Wantai Biological Pharmacy Enterprise's ' three-year median payout ratio is on the lower side at 12% implying that it is retaining a higher percentage (88%) of its profits. So it looks like Beijing Wantai Biological Pharmacy Enterprise is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Beijing Wantai Biological Pharmacy Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.
Conclusion
In total, it does look like Beijing Wantai Biological Pharmacy Enterprise has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.