Declining Stock and Solid Fundamentals: Is The Market Wrong About CanSino Biologics Inc. (HKG:6185)?

By
Simply Wall St
Published
April 11, 2022
SEHK:6185
Source: Shutterstock

It is hard to get excited after looking at CanSino Biologics' (HKG:6185) recent performance, when its stock has declined 37% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to CanSino Biologics' ROE today.

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.

See our latest analysis for CanSino Biologics

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 CanSino Biologics is:

22% = CN¥1.9b ÷ CN¥8.5b (Based on the trailing twelve months to December 2021).

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$0.22 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of CanSino Biologics' Earnings Growth And 22% ROE

First thing first, we like that CanSino Biologics has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Under the circumstances, CanSino Biologics' considerable five year net income growth of 56% was to be expected.

Next, on comparing with the industry net income growth, we found that CanSino Biologics' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

past-earnings-growth
SEHK:6185 Past Earnings Growth April 11th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 CanSino Biologics is trading on a high P/E or a low P/E, relative to its industry.

Is CanSino Biologics Using Its Retained Earnings Effectively?

CanSino Biologics' ' three-year median payout ratio is on the lower side at 10% implying that it is retaining a higher percentage (90%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Conclusion

On the whole, we feel that CanSino Biologics' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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