YiChang HEC ChangJiang Pharmaceutical Co., Ltd.'s (HKG:1558) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

YiChang HEC ChangJiang Pharmaceutical (HKG:1558) has had a rough three months with its share price down 14%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to YiChang HEC ChangJiang Pharmaceutical'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for YiChang HEC ChangJiang Pharmaceutical

How To 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 YiChang HEC ChangJiang Pharmaceutical is:

31% = CN¥1.6b ÷ CN¥5.0b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.31.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

YiChang HEC ChangJiang Pharmaceutical's Earnings Growth And 31% ROE

Firstly, we acknowledge that YiChang HEC ChangJiang Pharmaceutical has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. Under the circumstances, YiChang HEC ChangJiang Pharmaceutical's considerable five year net income growth of 41% was to be expected.

As a next step, we compared YiChang HEC ChangJiang Pharmaceutical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is YiChang HEC ChangJiang Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is YiChang HEC ChangJiang Pharmaceutical Efficiently Re-investing Its Profits?

YiChang HEC ChangJiang Pharmaceutical has a three-year median payout ratio of 48% (where it is retaining 52% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and YiChang HEC ChangJiang Pharmaceutical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, YiChang HEC ChangJiang Pharmaceutical has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 21% over the next three years. However, YiChang HEC ChangJiang Pharmaceutical's future ROE is expected to decline to 19% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

On the whole, we feel that YiChang HEC ChangJiang Pharmaceutical's performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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