Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Simply Wall St · 08/30 22:06

With its stock down 25% over the past three months, it is easy to disregard Sunshine Guojian Pharmaceutical (Shanghai) (SHSE:688336). 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. In this article, we decided to focus on Sunshine Guojian Pharmaceutical (Shanghai)'s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

How Do You Calculate Return On Equity?

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 Sunshine Guojian Pharmaceutical (Shanghai) is:

6.9% = CN¥342m ÷ CN¥5.0b (Based on the trailing twelve months to March 2024).

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¥0.07 in profit.

Why Is ROE Important For 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 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.

Sunshine Guojian Pharmaceutical (Shanghai)'s Earnings Growth And 6.9% ROE

At first glance, Sunshine Guojian Pharmaceutical (Shanghai)'s ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.8%, we may spare it some thought. Particularly, the exceptional 30% net income growth seen by Sunshine Guojian Pharmaceutical (Shanghai) over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Sunshine Guojian Pharmaceutical (Shanghai)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.4% in the same 5-year period.

past-earnings-growth
SHSE:688336 Past Earnings Growth August 30th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Sunshine Guojian Pharmaceutical (Shanghai) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sunshine Guojian Pharmaceutical (Shanghai) Efficiently Re-investing Its Profits?

Sunshine Guojian Pharmaceutical (Shanghai)'s ' three-year median payout ratio is on the lower side at 9.5% implying that it is retaining a higher percentage (91%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Summary

Overall, we feel that Sunshine Guojian Pharmaceutical (Shanghai) certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.