Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd's (SZSE:000766) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's (SZSE:000766) stock is up by a considerable 9.2% over the past month. 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. Specifically, we decided to study Tonghua Golden-Horse Pharmaceutical Industry CoLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Tonghua Golden-Horse Pharmaceutical Industry CoLtd

How Is ROE Calculated?

ROE 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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd is:

1.9% = CN¥43m ÷ CN¥2.3b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 in profit.

What Is The Relationship Between ROE And 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.

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Earnings Growth And 1.9% ROE

It is quite clear that Tonghua Golden-Horse Pharmaceutical Industry CoLtd's ROE is rather low. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. In spite of this, Tonghua Golden-Horse Pharmaceutical Industry CoLtd was able to grow its net income considerably, at a rate of 29% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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 9.2%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Tonghua Golden-Horse Pharmaceutical Industry CoLtd Making Efficient Use Of Its Profits?

Given that Tonghua Golden-Horse Pharmaceutical Industry CoLtd doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like Tonghua Golden-Horse Pharmaceutical Industry CoLtd 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. To know the 1 risk we have identified for Tonghua Golden-Horse Pharmaceutical Industry CoLtd visit our risks dashboard for free.

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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