Is Hubei Hongyuan Pharmaceutical Technology Co., Ltd.'s (SZSE:301246) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Hubei Hongyuan Pharmaceutical Technology's (SZSE:301246) recent performance, when its stock has declined 34% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Hubei Hongyuan Pharmaceutical Technology's ROE today.

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 Hubei Hongyuan Pharmaceutical Technology

How Is ROE Calculated?

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 Hubei Hongyuan Pharmaceutical Technology is:

1.2% = CN¥54m ÷ CN¥4.4b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.01.

What Is The Relationship Between ROE And 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. 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.

Hubei Hongyuan Pharmaceutical Technology's Earnings Growth And 1.2% ROE

As you can see, Hubei Hongyuan Pharmaceutical Technology's ROE looks pretty weak. Not just that, even compared to the industry average of 7.7%, the company's ROE is entirely unremarkable. Therefore, Hubei Hongyuan Pharmaceutical Technology's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Hubei Hongyuan Pharmaceutical Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hubei Hongyuan Pharmaceutical Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hubei Hongyuan Pharmaceutical Technology Efficiently Re-investing Its Profits?

Hubei Hongyuan Pharmaceutical Technology has a low three-year median payout ratio of 20% (or a retention ratio of 80%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Only recently, Hubei Hongyuan Pharmaceutical Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Hubei Hongyuan Pharmaceutical Technology can be open to many interpretations. 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. So it may be worth checking this free detailed graph of Hubei Hongyuan Pharmaceutical Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.