Is Weakness In Beijing Tiantan Biological Products Co., Ltd. (SHSE:600161) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 10% over the past three months, it is easy to disregard Beijing Tiantan Biological Products (SHSE:600161). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Beijing Tiantan Biological Products' ROE in this article.

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 Beijing Tiantan Biological Products

How Do You 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 Beijing Tiantan Biological Products is:

12% = CN¥1.7b ÷ CN¥14b (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¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Beijing Tiantan Biological Products' Earnings Growth And 12% ROE

To start with, Beijing Tiantan Biological Products' ROE looks acceptable. On comparing with the average industry ROE of 6.0% the company's ROE looks pretty remarkable. Probably as a result of this, Beijing Tiantan Biological Products was able to see a decent growth of 17% over the last five years.

Next, on comparing with the industry net income growth, we found that Beijing Tiantan Biological Products' growth is quite high when compared to the industry average growth of 5.9% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 600161 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Beijing Tiantan Biological Products Using Its Retained Earnings Effectively?

Beijing Tiantan Biological Products has a low three-year median payout ratio of 18%, meaning that the company retains the remaining 82% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Beijing Tiantan Biological Products is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 22% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with Beijing Tiantan Biological Products' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.