Are Strong Financial Prospects The Force That Is Driving The Momentum In Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's SHSE:600329) Stock?

Simply Wall St · Dec 5, 2023 23:00

Tianjin Pharmaceutical Da Ren Tang Group's (SHSE:600329) stock is up by a considerable 22% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Tianjin Pharmaceutical Da Ren Tang Group'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

How Is ROE Calculated?

ROE 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 Tianjin Pharmaceutical Da Ren Tang Group is:

15% = CN¥969m ÷ CN¥6.5b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Tianjin Pharmaceutical Da Ren Tang Group's Earnings Growth And 15% ROE

At first glance, Tianjin Pharmaceutical Da Ren Tang Group seems to have a decent ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This certainly adds some context to Tianjin Pharmaceutical Da Ren Tang Group's decent 13% net income growth seen over the past five years.

As a next step, we compared Tianjin Pharmaceutical Da Ren Tang Group'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%.

past-earnings-growth — SHSE:600329 Past Earnings Growth December 6th 2023

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Tianjin Pharmaceutical Da Ren Tang Group is trading on a high P/E or a low P/E, relative to its industry.

Is Tianjin Pharmaceutical Da Ren Tang Group Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 50% (implying that the company retains 50% of its profits), it seems that Tianjin Pharmaceutical Da Ren Tang Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Tianjin Pharmaceutical Da Ren Tang Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Tianjin Pharmaceutical Da Ren Tang Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.