Zhejiang Jiuzhou Pharmaceutical Co., Ltd's (SHSE:603456) Stock Is Going Strong: Have Financials A Role To Play?

Zhejiang Jiuzhou Pharmaceutical's (SHSE:603456) stock is up by a considerable 15% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Zhejiang Jiuzhou Pharmaceutical's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zhejiang Jiuzhou Pharmaceutical

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 Zhejiang Jiuzhou Pharmaceutical is:

8.1% = CN¥700m ÷ CN¥8.6b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.08.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Zhejiang Jiuzhou Pharmaceutical's Earnings Growth And 8.1% ROE

At first glance, Zhejiang Jiuzhou Pharmaceutical's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.8%, so we won't completely dismiss the company. Particularly, the exceptional 27% net income growth seen by Zhejiang Jiuzhou Pharmaceutical over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. 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.

We then compared Zhejiang Jiuzhou Pharmaceutical's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.0% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Zhejiang Jiuzhou Pharmaceutical is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Jiuzhou Pharmaceutical Using Its Retained Earnings Effectively?

Zhejiang Jiuzhou Pharmaceutical has a three-year median payout ratio of 32% (where it is retaining 68% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Zhejiang Jiuzhou Pharmaceutical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Zhejiang Jiuzhou Pharmaceutical has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Zhejiang Jiuzhou Pharmaceutical has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.