Will Weakness in Hangzhou Bio-Sincerity Pharma-Tech Co.,Ltd.'s (SZSE:301096) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Hangzhou Bio-Sincerity Pharma-TechLtd's (SZSE:301096) recent performance, when its stock has declined 30% over the past three months. 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. In this article, we decided to focus on Hangzhou Bio-Sincerity Pharma-TechLtd's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Hangzhou Bio-Sincerity Pharma-TechLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hangzhou Bio-Sincerity Pharma-TechLtd is:

10% = CN¥287m ÷ CN¥2.8b (Based on the trailing twelve months to June 2024).

The 'return' is the profit 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¥0.10 in profit.

Why Is ROE Important For Earnings Growth?

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

Hangzhou Bio-Sincerity Pharma-TechLtd's Earnings Growth And 10% ROE

At first glance, Hangzhou Bio-Sincerity Pharma-TechLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 7.4% which we definitely can't overlook. Even more so after seeing Hangzhou Bio-Sincerity Pharma-TechLtd's exceptional 39% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Hangzhou Bio-Sincerity Pharma-TechLtd'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 20%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Hangzhou Bio-Sincerity Pharma-TechLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Hangzhou Bio-Sincerity Pharma-TechLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Hangzhou Bio-Sincerity Pharma-TechLtd is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Hangzhou Bio-Sincerity Pharma-TechLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Hangzhou Bio-Sincerity Pharma-TechLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

In total, we are pretty happy with Hangzhou Bio-Sincerity Pharma-TechLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.