Is PharmaBlock Sciences (Nanjing), Inc.'s (SZSE:300725) Stock Price Struggling As A Result Of Its Mixed Financials?

PharmaBlock Sciences (Nanjing) (SZSE:300725) has had a rough week with its share price down 6.6%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study PharmaBlock Sciences (Nanjing)'s ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for PharmaBlock Sciences (Nanjing)

How To 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 PharmaBlock Sciences (Nanjing) is:

6.0% = CN¥175m ÷ CN¥2.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

PharmaBlock Sciences (Nanjing)'s Earnings Growth And 6.0% ROE

At first glance, PharmaBlock Sciences (Nanjing)'s ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.8%. As a result, PharmaBlock Sciences (Nanjing)'s flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that PharmaBlock Sciences (Nanjing)'s reported growth was lower than the industry growth of 8.8% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is PharmaBlock Sciences (Nanjing) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PharmaBlock Sciences (Nanjing) Making Efficient Use Of Its Profits?

PharmaBlock Sciences (Nanjing)'s low three-year median payout ratio of 7.2%, (meaning the company retains93% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, PharmaBlock Sciences (Nanjing) 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 PharmaBlock Sciences (Nanjing)'s performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.