Is Zhejiang Jingxin Pharmaceutical Co., Ltd.'s (SZSE:002020) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Zhejiang Jingxin Pharmaceutical's (SZSE:002020) stock increased significantly by 10% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Zhejiang Jingxin Pharmaceutical's ROE today.

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 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 Zhejiang Jingxin Pharmaceutical

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 Zhejiang Jingxin Pharmaceutical is:

12% = CN¥728m ÷ CN¥5.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Zhejiang Jingxin Pharmaceutical's Earnings Growth And 12% ROE

At first glance, Zhejiang Jingxin Pharmaceutical seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.8%. This probably laid the ground for Zhejiang Jingxin Pharmaceutical's moderate 6.5% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Jingxin Pharmaceutical's reported growth was lower than the industry growth of 8.8% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 002020? You can find out in our latest intrinsic value infographic research report.

Is Zhejiang Jingxin Pharmaceutical Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Zhejiang Jingxin Pharmaceutical is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Zhejiang Jingxin Pharmaceutical has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 35%. As a result, Zhejiang Jingxin Pharmaceutical's ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Conclusion

On the whole, we feel that Zhejiang Jingxin Pharmaceutical's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.