Most readers would already be aware that Shenyang Xingqi PharmaceuticalLtd's (SZSE:300573) stock increased significantly by 71% over the past three months. 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. Particularly, we will be paying attention to Shenyang Xingqi PharmaceuticalLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shenyang Xingqi PharmaceuticalLtd is:

15% = CN¥255m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.15 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Shenyang Xingqi PharmaceuticalLtd's Earnings Growth And 15% ROE

To start with, Shenyang Xingqi PharmaceuticalLtd's ROE looks acceptable. On comparing with the average industry ROE of 7.8% the company's ROE looks pretty remarkable. This probably laid the ground for Shenyang Xingqi PharmaceuticalLtd's significant 36% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Shenyang Xingqi PharmaceuticalLtd'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 9.7%.

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. 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 Shenyang Xingqi PharmaceuticalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenyang Xingqi PharmaceuticalLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Shenyang Xingqi PharmaceuticalLtd is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Shenyang Xingqi PharmaceuticalLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Shenyang Xingqi PharmaceuticalLtd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

Overall, we are quite pleased with Shenyang Xingqi 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. The latest industry analyst forecasts show that the company is expected to maintain 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.