Jiangsu Kanion Pharmaceutical Co.,Ltd. (SHSE:600557) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Jiangsu Kanion PharmaceuticalLtd (SHSE:600557) has had a rough three months with its share price down 12%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Jiangsu Kanion PharmaceuticalLtd's ROE today.

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 Jiangsu Kanion PharmaceuticalLtd

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 Jiangsu Kanion PharmaceuticalLtd is:

10% = CN¥551m ÷ CN¥5.5b (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¥0.10.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Jiangsu Kanion PharmaceuticalLtd's Earnings Growth And 10% ROE

On the face of it, Jiangsu Kanion PharmaceuticalLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.6% which we definitely can't overlook. Still, Jiangsu Kanion PharmaceuticalLtd's net income growth of 3.7% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Jiangsu Kanion PharmaceuticalLtd'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 9.2% 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Jiangsu Kanion PharmaceuticalLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Kanion PharmaceuticalLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 28% (or a retention ratio of 72% over the past three years, Jiangsu Kanion PharmaceuticalLtd has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Jiangsu Kanion PharmaceuticalLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 31%. Regardless, the future ROE for Jiangsu Kanion PharmaceuticalLtd is predicted to rise to 12% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Jiangsu Kanion PharmaceuticalLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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