Does The Market Have A Low Tolerance For Shaanxi Meibang Pharmaceutical Group Co., Ltd.'s (SHSE:605033) Mixed Fundamentals?

With its stock down 14% over the past month, it is easy to disregard Shaanxi Meibang Pharmaceutical Group (SHSE:605033). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Shaanxi Meibang Pharmaceutical Group's ROE.

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.

View our latest analysis for Shaanxi Meibang Pharmaceutical Group

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 Shaanxi Meibang Pharmaceutical Group is:

2.8% = CN¥33m ÷ CN¥1.2b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Shaanxi Meibang Pharmaceutical Group's Earnings Growth And 2.8% ROE

It is quite clear that Shaanxi Meibang Pharmaceutical Group's ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. As a result, Shaanxi Meibang Pharmaceutical Group's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Shaanxi Meibang Pharmaceutical Group's net income growth with the industry and discovered that the industry saw an average growth of 7.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Shaanxi Meibang Pharmaceutical Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shaanxi Meibang Pharmaceutical Group Making Efficient Use Of Its Profits?

Shaanxi Meibang Pharmaceutical Group has a low three-year median payout ratio of 22% (or a retention ratio of 78%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Only recently, Shaanxi Meibang Pharmaceutical Group started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Shaanxi Meibang Pharmaceutical Group. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Shaanxi Meibang Pharmaceutical Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.