Zhejiang Shouxiangu Pharmaceutical Co., Ltd.'s (SHSE:603896) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Simply Wall St · 10/14 23:24

Zhejiang Shouxiangu Pharmaceutical's (SHSE:603896) stock is up by a considerable 17% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Zhejiang Shouxiangu Pharmaceutical's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Zhejiang Shouxiangu Pharmaceutical

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhejiang Shouxiangu Pharmaceutical is:

12% = CN¥265m ÷ CN¥2.2b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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.

Zhejiang Shouxiangu Pharmaceutical's Earnings Growth And 12% ROE

At first glance, Zhejiang Shouxiangu Pharmaceutical seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.8%. Probably as a result of this, Zhejiang Shouxiangu Pharmaceutical was able to see an impressive net income growth of 21% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zhejiang Shouxiangu Pharmaceutical's growth is quite high when compared to the industry average growth of 9.9% in the same period, which is great to see.

past-earnings-growth
SHSE:603896 Past Earnings Growth October 14th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Zhejiang Shouxiangu Pharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Shouxiangu Pharmaceutical Efficiently Re-investing Its Profits?

Zhejiang Shouxiangu Pharmaceutical has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Shouxiangu Pharmaceutical is reinvesting its earnings efficiently.

Besides, Zhejiang Shouxiangu Pharmaceutical has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Accordingly, forecasts suggest that Zhejiang Shouxiangu Pharmaceutical's future ROE will be 13% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Zhejiang Shouxiangu Pharmaceutical'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. 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.