Is Concord Biotech Limited's (NSE:CONCORDBIO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Concord Biotech's (NSE:CONCORDBIO) stock is up by a considerable 21% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Concord Biotech's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Concord Biotech

How To 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 Concord Biotech is:

21% = ₹3.1b ÷ ₹15b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.21 in profit.

What Has ROE Got To Do With 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.

Concord Biotech's Earnings Growth And 21% ROE

To begin with, Concord Biotech seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. This probably laid the ground for Concord Biotech's moderate 13% net income growth seen over the past five years.

Next, on comparing Concord Biotech's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Concord Biotech is trading on a high P/E or a low P/E, relative to its industry.

Is Concord Biotech Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 30% (implying that the company retains 70% of its profits), it seems that Concord Biotech is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 26%. As a result, Concord Biotech's ROE is not expected to change by much either, which we inferred from the analyst estimate of 24% for future ROE.

Summary

Overall, we are quite pleased with Concord Biotech's performance. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.