Giant Biogene Holding Co., Ltd.'s (HKG:2367) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Giant Biogene Holding (HKG:2367) has had a rough three months with its share price down 19%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Giant Biogene Holding's ROE in this article.

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.

See our latest analysis for Giant Biogene Holding

How To Calculate Return On Equity?

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 Giant Biogene Holding is:

30% = CN¥1.8b ÷ CN¥6.0b (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 HK$1 of its shareholder's investments, the company generates a profit of HK$0.30.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Giant Biogene Holding's Earnings Growth And 30% ROE

To begin with, Giant Biogene Holding has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.5% the company's ROE is quite impressive. So, the substantial 21% net income growth seen by Giant Biogene Holding over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Giant Biogene Holding's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Giant Biogene Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Giant Biogene Holding Using Its Retained Earnings Effectively?

Giant Biogene Holding has a three-year median payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. So it seems that Giant Biogene Holding is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. As a result, Giant Biogene Holding's ROE is not expected to change by much either, which we inferred from the analyst estimate of 34% for future ROE.

Summary

In total, we are pretty happy with Giant Biogene Holding's performance. 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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.