Does The Market Have A Low Tolerance For Shanghai Fosun Pharmaceutical (Group) Co., Ltd.'s (SHSE:600196) Mixed Fundamentals?

Shanghai Fosun Pharmaceutical (Group) (SHSE:600196) has had a rough month with its share price down 9.0%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Shanghai Fosun Pharmaceutical (Group)'s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Shanghai Fosun Pharmaceutical (Group)

How To 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 Shanghai Fosun Pharmaceutical (Group) is:

4.5% = CN¥2.6b ÷ CN¥58b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Shanghai Fosun Pharmaceutical (Group)'s Earnings Growth And 4.5% ROE

It is hard to argue that Shanghai Fosun Pharmaceutical (Group)'s ROE is much good in and of itself. Even compared to the average industry ROE of 7.7%, the company's ROE is quite dismal. As a result, Shanghai Fosun 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 Shanghai Fosun Pharmaceutical (Group)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.4% in the same 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 Shanghai Fosun Pharmaceutical (Group) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Fosun Pharmaceutical (Group) Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 30% (meaning the company retains70% of profits) in the last three-year period, Shanghai Fosun Pharmaceutical (Group)'s earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Shanghai Fosun Pharmaceutical (Group) has been paying dividends for at least ten years or more 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 Shanghai Fosun Pharmaceutical (Group) can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com