Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG:874) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) recent performance, when its stock has declined 5.2% 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 Guangzhou Baiyunshan Pharmaceutical Holdings' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings

How Is ROE Calculated?

Return on equity 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 Guangzhou Baiyunshan Pharmaceutical Holdings is:

10% = CN¥2.9b ÷ CN¥28b (Based on the trailing twelve months to September 2020).

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$0.10 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Guangzhou Baiyunshan Pharmaceutical Holdings' Earnings Growth And 10% ROE

At first glance, Guangzhou Baiyunshan Pharmaceutical Holdings seems to have a decent ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by Guangzhou Baiyunshan Pharmaceutical Holdings.

We then performed a comparison between Guangzhou Baiyunshan Pharmaceutical Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 16% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Guangzhou Baiyunshan Pharmaceutical Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangzhou Baiyunshan Pharmaceutical Holdings Using Its Retained Earnings Effectively?

Guangzhou Baiyunshan Pharmaceutical Holdings' three-year median payout ratio to shareholders is 23% (implying that it retains 77% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Guangzhou Baiyunshan Pharmaceutical Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Guangzhou Baiyunshan Pharmaceutical Holdings' 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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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