Is Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd's (SHSE:688336) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Sunshine Guojian Pharmaceutical (Shanghai)'s (SHSE:688336) stock is up by a considerable 26% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Sunshine Guojian Pharmaceutical (Shanghai)'s ROE.

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 Sunshine Guojian Pharmaceutical (Shanghai)

How To Calculate Return On Equity?

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 Sunshine Guojian Pharmaceutical (Shanghai) is:

7.0% = CN¥351m ÷ CN¥5.0b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.07 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. 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 Sunshine Guojian Pharmaceutical (Shanghai)'s Earnings Growth And 7.0% ROE

On the face of it, Sunshine Guojian Pharmaceutical (Shanghai)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.9%. Moreover, we are quite pleased to see that Sunshine Guojian Pharmaceutical (Shanghai)'s net income grew significantly at a rate of 37% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Sunshine Guojian Pharmaceutical (Shanghai)'s growth is quite high when compared to the industry average growth of 7.6% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sunshine Guojian Pharmaceutical (Shanghai)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sunshine Guojian Pharmaceutical (Shanghai) Efficiently Re-investing Its Profits?

Sunshine Guojian Pharmaceutical (Shanghai)'s three-year median payout ratio to shareholders is 12%, which is quite low. This implies that the company is retaining 88% of its profits. So it looks like Sunshine Guojian Pharmaceutical (Shanghai) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 3.2% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, it does look like Sunshine Guojian Pharmaceutical (Shanghai) 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.