Declining Stock and Solid Fundamentals: Is The Market Wrong About Hunan Jiudian Pharmaceutical Co., Ltd. (SZSE:300705)?

With its stock down 21% over the past three months, it is easy to disregard Hunan Jiudian Pharmaceutical (SZSE:300705). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Hunan Jiudian Pharmaceutical'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Hunan Jiudian Pharmaceutical

How Do You Calculate Return On Equity?

Return on equity 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 Hunan Jiudian Pharmaceutical is:

21% = CN¥455m ÷ CN¥2.2b (Based on the trailing twelve months to June 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¥0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Hunan Jiudian Pharmaceutical's Earnings Growth And 21% ROE

At first glance, Hunan Jiudian Pharmaceutical seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.6%. This certainly adds some context to Hunan Jiudian Pharmaceutical's exceptional 40% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Hunan Jiudian Pharmaceutical's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.0% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hunan Jiudian Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hunan Jiudian Pharmaceutical Using Its Retained Earnings Effectively?

Hunan Jiudian Pharmaceutical has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hunan Jiudian Pharmaceutical is reinvesting its earnings efficiently.

Moreover, Hunan Jiudian Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 24%. Accordingly, forecasts suggest that Hunan Jiudian Pharmaceutical's future ROE will be 24% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Hunan Jiudian Pharmaceutical's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.