Should Weakness in Hangzhou Jiuyuan Genetic Biopharmaceutical Co., Ltd.'s (HKG:2566) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Hangzhou Jiuyuan Genetic Biopharmaceutical (HKG:2566) has had a rough three months with its share price down 41%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Hangzhou Jiuyuan Genetic Biopharmaceutical's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

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 Hangzhou Jiuyuan Genetic Biopharmaceutical is:

7.7% = CN¥123m ÷ CN¥1.6b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.08 in profit.

See our latest analysis for Hangzhou Jiuyuan Genetic Biopharmaceutical

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. 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. 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.

Hangzhou Jiuyuan Genetic Biopharmaceutical's Earnings Growth And 7.7% ROE

On the face of it, Hangzhou Jiuyuan Genetic Biopharmaceutical's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.9%, we may spare it some thought. On the other hand, Hangzhou Jiuyuan Genetic Biopharmaceutical reported a moderate 9.5% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Hangzhou Jiuyuan Genetic Biopharmaceutical's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 48% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Hangzhou Jiuyuan Genetic Biopharmaceutical is trading on a high P/E or a low P/E, relative to its industry.

Is Hangzhou Jiuyuan Genetic Biopharmaceutical Using Its Retained Earnings Effectively?

In Hangzhou Jiuyuan Genetic Biopharmaceutical's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.2% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

While Hangzhou Jiuyuan Genetic Biopharmaceutical has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that Hangzhou Jiuyuan Genetic Biopharmaceutical has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors.

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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.