Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd.'s (HKG:1349) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's (HKG:1349) recent performance, when its stock has declined 30% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical

How Do You 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 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 yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.10 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

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 16% in the same period, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

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

In total, we are pretty happy 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical.

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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.
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