It is hard to get excited after looking at Guiyang Xintian PharmaceuticalLtd's (SZSE:002873) recent performance, when its stock has declined 22% over the past three months. 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. In this article, we decided to focus on Guiyang Xintian PharmaceuticalLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guiyang Xintian PharmaceuticalLtd

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 Guiyang Xintian PharmaceuticalLtd is:

11% = CN¥106m ÷ CN¥944m (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

Why Is ROE Important For 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. 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.

Guiyang Xintian PharmaceuticalLtd's Earnings Growth And 11% ROE

At first glance, Guiyang Xintian PharmaceuticalLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 8.1% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 9.7% seen over the past five years by Guiyang Xintian PharmaceuticalLtd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Guiyang Xintian PharmaceuticalLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.0% in the same period.

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. If you're wondering about Guiyang Xintian PharmaceuticalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guiyang Xintian PharmaceuticalLtd Making Efficient Use Of Its Profits?

Guiyang Xintian PharmaceuticalLtd has a low three-year median payout ratio of 16%, meaning that the company retains the remaining 84% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Guiyang Xintian PharmaceuticalLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Guiyang Xintian PharmaceuticalLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.