Jiangsu Jibeier Pharmaceutical (SHSE:688566) has had a rough month with its share price down 27%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Jiangsu Jibeier Pharmaceutical's ROE.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Jiangsu Jibeier Pharmaceutical

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 Jiangsu Jibeier Pharmaceutical is:

9.4% = CN¥163m ÷ CN¥1.7b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

What Is The Relationship Between ROE And 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 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.

Jiangsu Jibeier Pharmaceutical's Earnings Growth And 9.4% ROE

At first glance, Jiangsu Jibeier Pharmaceutical's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.7%, so we won't completely dismiss the company. On the other hand, Jiangsu Jibeier Pharmaceutical reported a moderate 7.3% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Jiangsu Jibeier Pharmaceutical's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Jiangsu Jibeier Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Jibeier Pharmaceutical Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Jiangsu Jibeier Pharmaceutical suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Jiangsu Jibeier Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

Overall, we feel that Jiangsu Jibeier Pharmaceutical certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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.