Declining Stock and Decent Financials: Is The Market Wrong About Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645)?

It is hard to get excited after looking at Vcanbio Cell & Gene Engineering's (SHSE:600645) recent performance, when its stock has declined 9.6% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Vcanbio Cell & Gene Engineering's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Vcanbio Cell & Gene Engineering

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Vcanbio Cell & Gene Engineering is:

2.8% = CN¥105m ÷ CN¥3.8b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

Why Is ROE Important For 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. 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.

Vcanbio Cell & Gene Engineering's Earnings Growth And 2.8% ROE

It is quite clear that Vcanbio Cell & Gene Engineering's ROE is rather low. Not just that, even compared to the industry average of 5.8%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Vcanbio Cell & Gene Engineering grew its net income at a significant rate of 46% in the last 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 Vcanbio Cell & Gene Engineering'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 5.4%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Vcanbio Cell & Gene Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Vcanbio Cell & Gene Engineering Making Efficient Use Of Its Profits?

Vcanbio Cell & Gene Engineering doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Vcanbio Cell & Gene Engineering has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business.

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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