Shandong Pharmaceutical Glass Co.Ltd's (SHSE:600529) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Shandong Pharmaceutical GlassLtd (SHSE:600529) has had a rough month with its share price down 11%. 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. Particularly, we will be paying attention to Shandong Pharmaceutical GlassLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shandong Pharmaceutical GlassLtd

How To Calculate Return On Equity?

Return on equity 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 Shandong Pharmaceutical GlassLtd is:

11% = CN¥882m ÷ CN¥7.8b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Shandong Pharmaceutical GlassLtd's Earnings Growth And 11% ROE

At first glance, Shandong Pharmaceutical GlassLtd seems to have a decent ROE. On comparing with the average industry ROE of 7.1% the company's ROE looks pretty remarkable. This probably laid the ground for Shandong Pharmaceutical GlassLtd's moderate 12% net income growth seen over the past five years.

We then compared Shandong Pharmaceutical GlassLtd'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 6.1% in the same 5-year 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Shandong Pharmaceutical GlassLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Pharmaceutical GlassLtd Using Its Retained Earnings Effectively?

Shandong Pharmaceutical GlassLtd has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Shandong Pharmaceutical GlassLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. Accordingly, forecasts suggest that Shandong Pharmaceutical GlassLtd's future ROE will be 13% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Shandong Pharmaceutical GlassLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.