Youcare Pharmaceutical Group (SHSE:688658) has had a great run on the share market with its stock up by a significant 26% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Youcare Pharmaceutical Group'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Youcare Pharmaceutical Group
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Youcare Pharmaceutical Group is:
4.3% = CN¥156m ÷ CN¥3.6b (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¥0.04 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Youcare Pharmaceutical Group's Earnings Growth And 4.3% ROE
It is hard to argue that Youcare Pharmaceutical Group's ROE is much good in and of itself. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. Therefore, Youcare Pharmaceutical Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared Youcare Pharmaceutical Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
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. Has the market priced in the future outlook for 688658? You can find out in our latest intrinsic value infographic research report
Is Youcare Pharmaceutical Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 59% (meaning, the company retains only 41% of profits) for Youcare Pharmaceutical Group suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, Youcare Pharmaceutical Group has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Youcare Pharmaceutical Group. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Youcare Pharmaceutical Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.