Jiangsu Sinopep-Allsino Biopharmaceutical (SHSE:688076) has had a great run on the share market with its stock up by a significant 38% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Jiangsu Sinopep-Allsino Biopharmaceutical'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

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 Jiangsu Sinopep-Allsino Biopharmaceutical is:

8.1% = CN¥161m ÷ CN¥2.0b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

What Has ROE Got To Do With 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. 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.

Jiangsu Sinopep-Allsino Biopharmaceutical's Earnings Growth And 8.1% ROE

At first glance, Jiangsu Sinopep-Allsino Biopharmaceutical's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.3%, we may spare it some thought. Moreover, we are quite pleased to see that Jiangsu Sinopep-Allsino Biopharmaceutical's net income grew significantly at a rate of 23% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Jiangsu Sinopep-Allsino Biopharmaceutical's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jiangsu Sinopep-Allsino Biopharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Sinopep-Allsino Biopharmaceutical Efficiently Re-investing Its Profits?

The three-year median payout ratio for Jiangsu Sinopep-Allsino Biopharmaceutical is 32%, which is moderately low. The company is retaining the remaining 68%. So it seems that Jiangsu Sinopep-Allsino Biopharmaceutical is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

While Jiangsu Sinopep-Allsino Biopharmaceutical has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we feel that Jiangsu Sinopep-Allsino Biopharmaceutical certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high 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.