Are Shenzhen Kangtai Biological Products Co., Ltd.'s (SZSE:300601) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

Shenzhen Kangtai Biological Products (SZSE:300601) has had a rough three months with its share price down 21%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Shenzhen Kangtai Biological Products' ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shenzhen Kangtai Biological Products

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 Shenzhen Kangtai Biological Products is:

7.4% = CN¥710m ÷ CN¥9.6b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shenzhen Kangtai Biological Products' Earnings Growth And 7.4% ROE

On the face of it, Shenzhen Kangtai Biological Products' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.8%, is definitely interesting. However, Shenzhen Kangtai Biological Products has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

We then compared Shenzhen Kangtai Biological Products' net income growth with the industry and found that the average industry growth rate was 5.4% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Shenzhen Kangtai Biological Products is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Kangtai Biological Products Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 56% (meaning, the company retains only 44% of profits) for Shenzhen Kangtai Biological Products suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Shenzhen Kangtai Biological Products has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 37% over the next three years. As a result, the expected drop in Shenzhen Kangtai Biological Products' payout ratio explains the anticipated rise in the company's future ROE to 12%, over the same period.

Conclusion

On the whole, we feel that the performance shown by Shenzhen Kangtai Biological Products can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.

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