Nanjing Hicin Pharmaceutical Co., Ltd. (SZSE:300584) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Nanjing Hicin Pharmaceutical's (SZSE:300584) stock is up by a considerable 23% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Nanjing Hicin Pharmaceutical's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Nanjing Hicin Pharmaceutical

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 Nanjing Hicin Pharmaceutical is:

3.7% = CN¥37m ÷ CN¥1.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Nanjing Hicin Pharmaceutical's Earnings Growth And 3.7% ROE

It is hard to argue that Nanjing Hicin Pharmaceutical's ROE is much good in and of itself. Even when compared to the industry average of 7.6%, the ROE figure is pretty disappointing. Therefore, Nanjing Hicin Pharmaceutical's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Nanjing Hicin Pharmaceutical's net income growth with the industry and discovered that the industry saw an average growth of 9.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Nanjing Hicin Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanjing Hicin Pharmaceutical Efficiently Re-investing Its Profits?

Nanjing Hicin Pharmaceutical has a low three-year median payout ratio of 16% (or a retention ratio of 84%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Additionally, Nanjing Hicin Pharmaceutical has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we're a bit ambivalent about Nanjing Hicin Pharmaceutical's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Nanjing Hicin Pharmaceutical's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.