Beijing Tong Ren Tang Chinese Medicine Company Limited's (HKG:3613) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Beijing Tong Ren Tang Chinese Medicine's (HKG:3613) stock is up by a considerable 13% over the past week. 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 Beijing Tong Ren Tang Chinese Medicine'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Beijing Tong Ren Tang Chinese Medicine

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 Beijing Tong Ren Tang Chinese Medicine is:

13% = HK$533m ÷ HK$4.0b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.13 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 13% ROE

To begin with, Beijing Tong Ren Tang Chinese Medicine seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. However, we are curious as to how the high returns still resulted in flat growth for Beijing Tong Ren Tang Chinese Medicine in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

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 5.7% 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. 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. Has the market priced in the future outlook for 3613? You can find out in our latest intrinsic value infographic research report.

Is Beijing Tong Ren Tang Chinese Medicine Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 41% (or a retention ratio of 59%), Beijing Tong Ren Tang Chinese Medicine hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

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.

Conclusion

On the whole, we do feel that Beijing Tong Ren Tang Chinese Medicine 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.