Stock Analysis

Dawnrays Pharmaceutical (Holdings) Limited's (HKG:2348) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

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SEHK:2348
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Dawnrays Pharmaceutical (Holdings)'s (HKG:2348) stock is up by a considerable 50% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Dawnrays Pharmaceutical (Holdings)'s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Dawnrays Pharmaceutical (Holdings)

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 Dawnrays Pharmaceutical (Holdings) is:

11% = CN¥232m ÷ CN¥2.1b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.11 in profit.

What Is The Relationship Between ROE And 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. 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 Dawnrays Pharmaceutical (Holdings)'s Earnings Growth And 11% ROE

At first glance, Dawnrays Pharmaceutical (Holdings) seems to have a decent ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Dawnrays Pharmaceutical (Holdings) saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

As a next step, we compared Dawnrays Pharmaceutical (Holdings)'s net income growth with the industry and discovered that the industry saw an average growth of 15% in the same period.

past-earnings-growth
SEHK:2348 Past Earnings Growth December 23rd 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Dawnrays Pharmaceutical (Holdings)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dawnrays Pharmaceutical (Holdings) Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 34% (or a retention ratio of 66%), Dawnrays Pharmaceutical (Holdings) hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Dawnrays Pharmaceutical (Holdings) has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we do feel that Dawnrays Pharmaceutical (Holdings) has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Dawnrays Pharmaceutical (Holdings) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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