Declining Stock and Decent Financials: Is The Market Wrong About Guiyang Xintian Pharmaceutical Co.,Ltd. (SZSE:002873)?

Guiyang Xintian PharmaceuticalLtd (SZSE:002873) has had a rough three months with its share price down 32%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Guiyang Xintian PharmaceuticalLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guiyang Xintian PharmaceuticalLtd

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 Guiyang Xintian PharmaceuticalLtd is:

7.0% = CN¥71m ÷ CN¥1.0b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Guiyang Xintian PharmaceuticalLtd's Earnings Growth And 7.0% ROE

On the face of it, Guiyang Xintian PharmaceuticalLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.6%, we may spare it some thought. On the other hand, Guiyang Xintian PharmaceuticalLtd reported a moderate 7.8% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Guiyang Xintian PharmaceuticalLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Guiyang Xintian PharmaceuticalLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guiyang Xintian PharmaceuticalLtd Using Its Retained Earnings Effectively?

In Guiyang Xintian PharmaceuticalLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 19% (or a retention ratio of 81%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Guiyang Xintian PharmaceuticalLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

Overall, we feel that Guiyang Xintian PharmaceuticalLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable 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.

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