Shanghai Pharmaceuticals Holding's (SHSE:601607) stock is up by a considerable 11% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Shanghai Pharmaceuticals Holding's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Shanghai Pharmaceuticals Holding
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Shanghai Pharmaceuticals Holding is:
6.5% = CN¥5.3b ÷ CN¥82b (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
On the face of it, Shanghai Pharmaceuticals Holding's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.5%, we may spare it some thought. Having said that, Shanghai Pharmaceuticals Holding's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.
We then compared Shanghai Pharmaceuticals Holding's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.3% in the same 5-year period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 601607 worth today? The intrinsic value infographic in our free research report helps visualize whether 601607 is currently mispriced by the market.
Despite having a normal three-year median payout ratio of 38% (implying that the company keeps 62% of its income) over the last three years, Shanghai Pharmaceuticals Holding has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Shanghai Pharmaceuticals Holding has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 37%. However, Shanghai Pharmaceuticals Holding's ROE is predicted to rise to 7.9% despite there being no anticipated change in its payout ratio.
On the whole, we feel that the performance shown by Shanghai Pharmaceuticals Holding can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.