Henan Taloph Pharmaceutical Stock Co.,Ltd (SHSE:600222) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Henan Taloph Pharmaceutical StockLtd (SHSE:600222) has had a great run on the share market with its stock up by a significant 10% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Henan Taloph Pharmaceutical StockLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Henan Taloph Pharmaceutical StockLtd

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 Henan Taloph Pharmaceutical StockLtd is:

5.8% = CN¥94m ÷ CN¥1.6b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Henan Taloph Pharmaceutical StockLtd's Earnings Growth And 5.8% ROE

On the face of it, Henan Taloph Pharmaceutical StockLtd's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.7% either. Accordingly, Henan Taloph Pharmaceutical StockLtd's low net income growth of 3.6% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Henan Taloph Pharmaceutical StockLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.1% in the same 5-year period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Henan Taloph Pharmaceutical StockLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Henan Taloph Pharmaceutical StockLtd Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 11% (implying that the company retains the remaining 89% of its income) suggests that Henan Taloph Pharmaceutical StockLtd is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Henan Taloph Pharmaceutical StockLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Henan Taloph Pharmaceutical StockLtd can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Henan Taloph Pharmaceutical StockLtd by visiting our risks dashboard for free on our platform here.

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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.