Is Shenzhen Salubris Pharmaceuticals Co., Ltd.'s (SZSE:002294) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 9.0% over the past three months, it is easy to disregard Shenzhen Salubris Pharmaceuticals (SZSE:002294). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Shenzhen Salubris Pharmaceuticals' 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.

View our latest analysis for Shenzhen Salubris Pharmaceuticals

How Is ROE Calculated?

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 Shenzhen Salubris Pharmaceuticals is:

7.1% = CN¥616m ÷ CN¥8.6b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shenzhen Salubris Pharmaceuticals' Earnings Growth And 7.1% ROE

When you first look at it, Shenzhen Salubris Pharmaceuticals' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. On the other hand, Shenzhen Salubris Pharmaceuticals reported a moderate 6.8% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Shenzhen Salubris Pharmaceuticals' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.1% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is 002294 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shenzhen Salubris Pharmaceuticals Efficiently Re-investing Its Profits?

While Shenzhen Salubris Pharmaceuticals has a three-year median payout ratio of 89% (which means it retains 11% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Shenzhen Salubris Pharmaceuticals 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 45% over the next three years. As a result, the expected drop in Shenzhen Salubris Pharmaceuticals' payout ratio explains the anticipated rise in the company's future ROE to 8.6%, over the same period.

Conclusion

Overall, we have mixed feelings about Shenzhen Salubris Pharmaceuticals. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. 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.