With its stock down 5.9% over the past month, it is easy to disregard PharmaBlock Sciences (Nanjing) (SZSE:300725). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study PharmaBlock Sciences (Nanjing)'s ROE in this article.

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

View our latest analysis for PharmaBlock Sciences (Nanjing)

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for PharmaBlock Sciences (Nanjing) is:

7.8% = CN¥219m ÷ CN¥2.8b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

PharmaBlock Sciences (Nanjing)'s Earnings Growth And 7.8% ROE

On the face of it, PharmaBlock Sciences (Nanjing)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.4%. On the other hand, PharmaBlock Sciences (Nanjing) reported a moderate 19% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared PharmaBlock Sciences (Nanjing)'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 11%.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if PharmaBlock Sciences (Nanjing) is trading on a high P/E or a low P/E, relative to its industry.

Is PharmaBlock Sciences (Nanjing) Efficiently Re-investing Its Profits?

In PharmaBlock Sciences (Nanjing)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.6% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Additionally, PharmaBlock Sciences (Nanjing) has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like PharmaBlock Sciences (Nanjing) has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.