Has Anhui Wanbang Pharmaceutical Technology Co.,Ltd.'s (SZSE:301520) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Anhui Wanbang Pharmaceutical TechnologyLtd's (SZSE:301520) stock increased significantly by 20% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Anhui Wanbang Pharmaceutical TechnologyLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Anhui Wanbang Pharmaceutical TechnologyLtd

How Do You 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 Anhui Wanbang Pharmaceutical TechnologyLtd is:

7.4% = CN¥109m ÷ CN¥1.5b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Anhui Wanbang Pharmaceutical TechnologyLtd's Earnings Growth And 7.4% ROE

At first glance, Anhui Wanbang Pharmaceutical TechnologyLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.4%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Anhui Wanbang Pharmaceutical TechnologyLtd's net income grew significantly at a rate of 21% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Anhui Wanbang Pharmaceutical TechnologyLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% 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. 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 Anhui Wanbang Pharmaceutical TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Anhui Wanbang Pharmaceutical TechnologyLtd Efficiently Re-investing Its Profits?

Anhui Wanbang Pharmaceutical TechnologyLtd's three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. So it seems that Anhui Wanbang Pharmaceutical TechnologyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Summary

Overall, we feel that Anhui Wanbang Pharmaceutical TechnologyLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Anhui Wanbang Pharmaceutical TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.