Zhejiang Xianju Pharmaceutical Co.,Ltd.'s (SZSE:002332) Stock Has Fared Decently: Is the Market Following Strong Financials?

Zhejiang Xianju PharmaceuticalLtd's (SZSE:002332) stock is up by 9.7% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Zhejiang Xianju PharmaceuticalLtd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Zhejiang Xianju PharmaceuticalLtd

How To 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 Zhejiang Xianju PharmaceuticalLtd is:

9.9% = CN¥589m ÷ CN¥6.0b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Zhejiang Xianju PharmaceuticalLtd's Earnings Growth And 9.9% ROE

On the face of it, Zhejiang Xianju PharmaceuticalLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.6% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by Zhejiang Xianju PharmaceuticalLtd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Zhejiang Xianju PharmaceuticalLtd's growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhejiang Xianju PharmaceuticalLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Xianju PharmaceuticalLtd Efficiently Re-investing Its Profits?

Zhejiang Xianju PharmaceuticalLtd has a three-year median payout ratio of 25%, which implies that it retains the remaining 75% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Zhejiang Xianju PharmaceuticalLtd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Zhejiang Xianju PharmaceuticalLtd's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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.

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