Are Beijing Tong Ren Tang Chinese Medicine Company Limited's (HKG:3613) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Beijing Tong Ren Tang Chinese Medicine (HKG:3613) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Beijing Tong Ren Tang Chinese Medicine's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Beijing Tong Ren Tang Chinese Medicine

How Is ROE Calculated?

ROE 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 Beijing Tong Ren Tang Chinese Medicine is:

20% = HK$751m ÷ HK$3.7b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.20.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Beijing Tong Ren Tang Chinese Medicine's Earnings Growth And 20% ROE

To start with, Beijing Tong Ren Tang Chinese Medicine's ROE looks acceptable. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Despite this, Beijing Tong Ren Tang Chinese Medicine's five year net income growth was quite low averaging at only 3.2%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Beijing Tong Ren Tang Chinese Medicine's reported growth was lower than the industry growth of 4.8% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is 3613 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Beijing Tong Ren Tang Chinese Medicine Making Efficient Use Of Its Profits?

While Beijing Tong Ren Tang Chinese Medicine has a decent three-year median payout ratio of 40% (or a retention ratio of 60%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Beijing Tong Ren Tang Chinese Medicine has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Beijing Tong Ren Tang Chinese Medicine has some positive aspects to its business. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.