With its stock down 30% over the past three months, it is easy to disregard SciClone Pharmaceuticals (Holdings) (HKG:6600). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on SciClone Pharmaceuticals (Holdings)'s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
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 SciClone Pharmaceuticals (Holdings) is:
40% = CN¥779m ÷ CN¥1.9b (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.40 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
SciClone Pharmaceuticals (Holdings)'s Earnings Growth And 40% ROE
To begin with, SciClone Pharmaceuticals (Holdings) has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. As a result, SciClone Pharmaceuticals (Holdings)'s exceptional 29% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that SciClone Pharmaceuticals (Holdings)'s growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.
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. 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 SciClone Pharmaceuticals (Holdings)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is SciClone Pharmaceuticals (Holdings) Using Its Retained Earnings Effectively?
Overall, we are quite pleased with SciClone Pharmaceuticals (Holdings)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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