Are Beijing Scitop Bio-tech Co., Ltd.'s (SZSE:300858) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Beijing Scitop Bio-tech's (SZSE:300858) recent performance, when its stock has declined 11% over the past week. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Beijing Scitop Bio-tech's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Beijing Scitop Bio-tech

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 Beijing Scitop Bio-tech is:

5.2% = CN¥92m ÷ CN¥1.8b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Beijing Scitop Bio-tech's Earnings Growth And 5.2% ROE

At first glance, Beijing Scitop Bio-tech's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.1% either. As a result, Beijing Scitop Bio-tech reported a very low income growth of 2.4% over the past five years.

As a next step, we compared Beijing Scitop Bio-tech's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 2.9% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Beijing Scitop Bio-tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Beijing Scitop Bio-tech Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 66% (or a retention ratio of 34%), most of Beijing Scitop Bio-tech's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Beijing Scitop Bio-tech has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Beijing Scitop Bio-tech can be open to many interpretations. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.