Weak Financial Prospects Seem To Be Dragging Down Shanghai Shenqi Pharmaceutical Investment Management Co., Ltd. (SHSE:600613) Stock

Shanghai Shenqi Pharmaceutical Investment Management (SHSE:600613) has had a rough month with its share price down 19%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Shanghai Shenqi Pharmaceutical Investment Management's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Shanghai Shenqi Pharmaceutical Investment Management

How Is ROE Calculated?

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 Shanghai Shenqi Pharmaceutical Investment Management is:

2.5% = CN¥60m ÷ CN¥2.4b (Based on the trailing twelve months to March 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¥0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Shanghai Shenqi Pharmaceutical Investment Management's Earnings Growth And 2.5% ROE

As you can see, Shanghai Shenqi Pharmaceutical Investment Management's ROE looks pretty weak. Even compared to the average industry ROE of 7.7%, the company's ROE is quite dismal. Although, we can see that Shanghai Shenqi Pharmaceutical Investment Management saw a modest net income growth of 6.8% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Shanghai Shenqi Pharmaceutical Investment Management'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.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Shanghai Shenqi Pharmaceutical Investment Management fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Shenqi Pharmaceutical Investment Management Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 91% (or a retention ratio of 9.1%) for Shanghai Shenqi Pharmaceutical Investment Management suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Shanghai Shenqi Pharmaceutical Investment Management is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Summary

Overall, we would be extremely cautious before making any decision on Shanghai Shenqi Pharmaceutical Investment Management. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. Up till now, we've only made a short study of the company's growth data. To gain further insights into Shanghai Shenqi Pharmaceutical Investment Management's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.