Are Strong Financial Prospects The Force That Is Driving The Momentum In Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's SHSE:600329) Stock?

Most readers would already be aware that Tianjin Pharmaceutical Da Ren Tang Group's (SHSE:600329) stock increased significantly by 15% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Tianjin Pharmaceutical Da Ren Tang Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tianjin Pharmaceutical Da Ren Tang Group is:

14% = CN¥920m ÷ CN¥6.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.14 in profit.

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 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.

Tianjin Pharmaceutical Da Ren Tang Group's Earnings Growth And 14% ROE

At first glance, Tianjin Pharmaceutical Da Ren Tang Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. This certainly adds some context to Tianjin Pharmaceutical Da Ren Tang Group's decent 11% net income growth seen over the past five years.

We then performed a comparison between Tianjin Pharmaceutical Da Ren Tang Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.1% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tianjin Pharmaceutical Da Ren Tang Group is trading on a high P/E or a low P/E, relative to its industry.

Is Tianjin Pharmaceutical Da Ren Tang Group Making Efficient Use Of Its Profits?

While Tianjin Pharmaceutical Da Ren Tang Group has a three-year median payout ratio of 81% (which means it retains 19% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, Tianjin Pharmaceutical Da Ren Tang Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Tianjin Pharmaceutical Da Ren Tang Group's performance has been quite good. 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. 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.