Are Strong Financial Prospects The Force That Is Driving The Momentum In Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd.'s HKG:1349) Stock?

Most readers would already be aware that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's (HKG:1349) stock increased significantly by 27% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical

How Do You 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is:

9.9% = CN¥190m ÷ CN¥1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.10 in profit.

What Has ROE Got To Do With 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 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.

A Side By Side comparison of Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's Earnings Growth And 9.9% ROE

At first glance, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 10%. This certainly adds some context to Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's moderate 8.1% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Making Efficient Use Of Its Profits?

Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has a three-year median payout ratio of 37%, which implies that it retains the remaining 63% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical.

If you decide to trade Shanghai Fudan-Zhangjiang Bio-Pharmaceutical, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.