Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd.'s (SZSE:300357) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Zhejiang Wolwo Bio-Pharmaceutical's (SZSE:300357) stock increased significantly by 32% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Zhejiang Wolwo Bio-Pharmaceutical's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Zhejiang Wolwo Bio-Pharmaceutical

How Do You 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 Wolwo Bio-Pharmaceutical is:

12% = CN¥298m ÷ CN¥2.5b (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¥0.12 in profit.

What Is The Relationship Between ROE And 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zhejiang Wolwo Bio-Pharmaceutical's Earnings Growth And 12% ROE

To begin with, Zhejiang Wolwo Bio-Pharmaceutical seems to have a respectable ROE. On comparing with the average industry ROE of 7.7% the company's ROE looks pretty remarkable. However, for some reason, the higher returns aren't reflected in Zhejiang Wolwo Bio-Pharmaceutical's meagre five year net income growth average of 2.5%. 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. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

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

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is 300357 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Zhejiang Wolwo Bio-Pharmaceutical Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 31% (or a retention ratio of 69% over the past three years, Zhejiang Wolwo Bio-Pharmaceutical has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Zhejiang Wolwo Bio-Pharmaceutical has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. However, Zhejiang Wolwo Bio-Pharmaceutical's ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we do feel that Zhejiang Wolwo Bio-Pharmaceutical has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.