With its stock down 5.2% over the past week, it is easy to disregard Guizhou Sanli PharmaceuticalLtd (SHSE:603439). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Guizhou Sanli PharmaceuticalLtd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Guizhou Sanli PharmaceuticalLtd
How Is ROE Calculated?
Return on equity 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 Guizhou Sanli PharmaceuticalLtd is:
18% = CN¥254m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.18.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Guizhou Sanli PharmaceuticalLtd's Earnings Growth And 18% ROE
To start with, Guizhou Sanli PharmaceuticalLtd's ROE looks acceptable. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This probably laid the ground for Guizhou Sanli PharmaceuticalLtd's moderate 19% net income growth seen over the past five years.
As a next step, we compared Guizhou Sanli 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 11%.
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. Is 603439 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Guizhou Sanli PharmaceuticalLtd Making Efficient Use Of Its Profits?
Guizhou Sanli PharmaceuticalLtd has a healthy combination of a moderate three-year median payout ratio of 42% (or a retention ratio of 58%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Guizhou Sanli PharmaceuticalLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
On the whole, we feel that Guizhou Sanli PharmaceuticalLtd's performance has been quite good. 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. 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.