Declining Stock and Decent Financials: Is The Market Wrong About Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957)?

It is hard to get excited after looking at Yunnan Botanee Bio-Technology GroupLTD's (SZSE:300957) recent performance, when its stock has declined 27% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Yunnan Botanee Bio-Technology GroupLTD's ROE today.

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 Yunnan Botanee Bio-Technology GroupLTD

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Yunnan Botanee Bio-Technology GroupLTD is:

9.9% = CN¥599m ÷ CN¥6.0b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Yunnan Botanee Bio-Technology GroupLTD's Earnings Growth And 9.9% ROE

At first glance, Yunnan Botanee Bio-Technology GroupLTD's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.9%, we may spare it some thought. Having said that, Yunnan Botanee Bio-Technology GroupLTD has shown a modest net income growth of 9.4% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Yunnan Botanee Bio-Technology GroupLTD'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 6.4% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 300957 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Yunnan Botanee Bio-Technology GroupLTD Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Yunnan Botanee Bio-Technology GroupLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Yunnan Botanee Bio-Technology GroupLTD is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. However, Yunnan Botanee Bio-Technology GroupLTD's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that Yunnan Botanee Bio-Technology GroupLTD certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.