Are Guangdong Jiaying Pharmaceutical Co., Ltd's (SZSE:002198) Mixed Financials Driving The Negative Sentiment?

Guangdong Jiaying Pharmaceutical (SZSE:002198) has had a rough week with its share price down 18%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Guangdong Jiaying Pharmaceutical's ROE.

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 Guangdong Jiaying 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 Guangdong Jiaying Pharmaceutical is:

1.7% = CN¥12m ÷ CN¥740m (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¥0.02 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Guangdong Jiaying Pharmaceutical's Earnings Growth And 1.7% ROE

It is hard to argue that Guangdong Jiaying Pharmaceutical's ROE is much good in and of itself. Even compared to the average industry ROE of 7.7%, the company's ROE is quite dismal. Despite this, surprisingly, Guangdong Jiaying Pharmaceutical saw an exceptional 54% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Guangdong Jiaying Pharmaceutical'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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guangdong Jiaying Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangdong Jiaying Pharmaceutical Using Its Retained Earnings Effectively?

Guangdong Jiaying Pharmaceutical has very a high three-year median payout ratio of 105% suggesting that the company's shareholders are getting paid from more than just the company's earnings. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 3 risks we have identified for Guangdong Jiaying Pharmaceutical visit our risks dashboard for free.

Additionally, Guangdong Jiaying Pharmaceutical has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we have mixed feelings about Guangdong Jiaying Pharmaceutical. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Guangdong Jiaying Pharmaceutical's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.