Is Jiangsu Nhwa Pharmaceutical Co., LTD's (SZSE:002262) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Jiangsu Nhwa Pharmaceutical's (SZSE:002262) stock increased significantly by 11% 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. In this article, we decided to focus on Jiangsu Nhwa Pharmaceutical's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You 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 Jiangsu Nhwa Pharmaceutical is:

16% = CN¥1.2b ÷ CN¥7.1b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.16 in profit.

Check out our latest analysis for Jiangsu Nhwa Pharmaceutical

What Is The Relationship Between ROE And 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.

Jiangsu Nhwa Pharmaceutical's Earnings Growth And 16% ROE

To start with, Jiangsu Nhwa Pharmaceutical's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.8%. Probably as a result of this, Jiangsu Nhwa Pharmaceutical was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that Jiangsu Nhwa Pharmaceutical's growth is quite high when compared to the industry average growth of 8.9% in the same period, which is great to see.

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. Is Jiangsu Nhwa Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jiangsu Nhwa Pharmaceutical Using Its Retained Earnings Effectively?

Jiangsu Nhwa Pharmaceutical has a low three-year median payout ratio of 24%, meaning that the company retains the remaining 76% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Jiangsu Nhwa Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 22% of its profits over the next three years. Accordingly, forecasts suggest that Jiangsu Nhwa Pharmaceutical's future ROE will be 18% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Jiangsu Nhwa Pharmaceutical's performance. 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 substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.