Hubei Biocause Heilen Pharmaceutical Co., Ltd. (SZSE:301211) Stock's On A Decline: Are Poor Fundamentals The Cause?

It is hard to get excited after looking at Hubei Biocause Heilen Pharmaceutical's (SZSE:301211) recent performance, when its stock has declined 11% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Hubei Biocause Heilen Pharmaceutical's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hubei Biocause Heilen Pharmaceutical is:

4.6% = CN¥106m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

See our latest analysis for Hubei Biocause Heilen Pharmaceutical

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Hubei Biocause Heilen Pharmaceutical's Earnings Growth And 4.6% ROE

It is hard to argue that Hubei Biocause Heilen Pharmaceutical's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.7%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Hubei Biocause Heilen Pharmaceutical's very little net income growth of 3.9% over the past five years.

As a next step, we compared Hubei Biocause Heilen Pharmaceutical's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.9% in the same 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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Hubei Biocause Heilen Pharmaceutical is trading on a high P/E or a low P/E, relative to its industry.

Is Hubei Biocause Heilen Pharmaceutical Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 68% (that is, the company retains only 32% of its income) over the past three years for Hubei Biocause Heilen Pharmaceutical suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

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

Summary

Overall, we would be extremely cautious before making any decision on Hubei Biocause Heilen Pharmaceutical. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. To know the 2 risks we have identified for Hubei Biocause Heilen Pharmaceutical visit our risks dashboard for free.

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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.