Guilin Sanjin Pharmaceutical Co., Ltd.'s (SZSE:002275) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Guilin Sanjin Pharmaceutical's (SZSE:002275) stock is up by a considerable 7.2% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Guilin Sanjin Pharmaceutical's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Guilin Sanjin Pharmaceutical

How Do You 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 Guilin Sanjin Pharmaceutical is:

14% = CN¥408m ÷ CN¥3.0b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.14.

Why Is ROE Important For 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. 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.

Guilin Sanjin Pharmaceutical's Earnings Growth And 14% ROE

To start with, Guilin Sanjin Pharmaceutical's ROE looks acceptable. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. Yet, Guilin Sanjin Pharmaceutical has posted measly growth of 2.4% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Guilin Sanjin Pharmaceutical's reported growth was lower than the industry growth of 9.1% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 002275 worth today? The intrinsic value infographic in our free research report helps visualize whether 002275 is currently mispriced by the market.

Is Guilin Sanjin Pharmaceutical Using Its Retained Earnings Effectively?

Guilin Sanjin Pharmaceutical's very high three-year median payout ratio of 125% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. That's a huge risk in our books. You can see the 2 risks we have identified for Guilin Sanjin Pharmaceutical by visiting our risks dashboard for free on our platform here.

Additionally, Guilin Sanjin Pharmaceutical has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about Guilin Sanjin Pharmaceutical. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. 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.

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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.