Zhejiang AngLiKang Pharmaceutical CO.,LTD. (SZSE:002940) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 14% over the past month, it is easy to disregard Zhejiang AngLiKang PharmaceuticalLTD (SZSE:002940). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Zhejiang AngLiKang PharmaceuticalLTD's ROE in this article.

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

View our latest analysis for Zhejiang AngLiKang PharmaceuticalLTD

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang AngLiKang PharmaceuticalLTD is:

9.6% = CN¥173m ÷ CN¥1.8b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 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. 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.

A Side By Side comparison of Zhejiang AngLiKang PharmaceuticalLTD's Earnings Growth And 9.6% ROE

When you first look at it, Zhejiang AngLiKang PharmaceuticalLTD's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 7.7% which we definitely can't overlook. This certainly adds some context to Zhejiang AngLiKang PharmaceuticalLTD's moderate 5.9% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Zhejiang AngLiKang PharmaceuticalLTD's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Zhejiang AngLiKang PharmaceuticalLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang AngLiKang PharmaceuticalLTD Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 30% (implying that the company retains 70% of its profits), it seems that Zhejiang AngLiKang PharmaceuticalLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

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

Summary

Overall, we feel that Zhejiang AngLiKang PharmaceuticalLTD certainly does have some positive factors to consider. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Zhejiang AngLiKang PharmaceuticalLTD.

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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.