Declining Stock and Solid Fundamentals: Is The Market Wrong About Henan Lingrui Pharmaceutical Co., Ltd. (SHSE:600285)?

Henan Lingrui Pharmaceutical (SHSE:600285) has had a rough three months with its share price down 4.0%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Henan Lingrui Pharmaceutical's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Henan Lingrui Pharmaceutical

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 Henan Lingrui Pharmaceutical is:

23% = CN¥676m ÷ CN¥2.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.23 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Lingrui Pharmaceutical's Earnings Growth And 23% ROE

To begin with, Henan Lingrui Pharmaceutical has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.7% also doesn't go unnoticed by us. This likely paved the way for the modest 18% net income growth seen by Henan Lingrui Pharmaceutical over the past five years.

As a next step, we compared Henan Lingrui Pharmaceutical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.1%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Henan Lingrui Pharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Henan Lingrui Pharmaceutical Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for Henan Lingrui Pharmaceutical suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Henan Lingrui Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 79% of its profits over the next three years. Accordingly, forecasts suggest that Henan Lingrui Pharmaceutical's future ROE will be 28% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Henan Lingrui Pharmaceutical's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.