Should Weakness in Northeast Pharmaceutical Group Co., Ltd.'s (SZSE:000597) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Northeast Pharmaceutical Group (SZSE:000597) has had a rough month with its share price down 9.1%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Northeast Pharmaceutical Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Northeast Pharmaceutical Group

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 Northeast Pharmaceutical Group is:

6.8% = CN¥362m ÷ CN¥5.4b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Northeast Pharmaceutical Group's Earnings Growth And 6.8% ROE

At first glance, Northeast Pharmaceutical Group's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.7%, we may spare it some thought. Looking at Northeast Pharmaceutical Group's exceptional 35% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Northeast Pharmaceutical Group'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 9.1%.

Earnings growth is a huge factor in stock valuation. 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. Is Northeast Pharmaceutical Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Northeast Pharmaceutical Group Efficiently Re-investing Its Profits?

Northeast Pharmaceutical Group's three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. By the looks of it, the dividend is well covered and Northeast Pharmaceutical Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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

Summary

In total, it does look like Northeast Pharmaceutical Group 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Northeast Pharmaceutical Group.

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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.