Weak Financial Prospects Seem To Be Dragging Down Johnson Chemical Pharmaceutical Works Co., Ltd. (GTSM:4747) Stock

Johnson Chemical Pharmaceutical Works (GTSM:4747) has had a rough month with its share price down 1.9%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Johnson Chemical Pharmaceutical Works' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Johnson Chemical Pharmaceutical Works

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 Johnson Chemical Pharmaceutical Works is:

8.5% = NT$72m ÷ NT$843m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Johnson Chemical Pharmaceutical Works' Earnings Growth And 8.5% ROE

On the face of it, Johnson Chemical Pharmaceutical Works' ROE is not much to talk about. However, its ROE is similar to the industry average of 8.1%, so we won't completely dismiss the company. Having said that, Johnson Chemical Pharmaceutical Works' net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared Johnson Chemical Pharmaceutical Works' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.9% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Johnson Chemical Pharmaceutical Works is trading on a high P/E or a low P/E, relative to its industry.

Is Johnson Chemical Pharmaceutical Works Making Efficient Use Of Its Profits?

Johnson Chemical Pharmaceutical Works has a high three-year median payout ratio of 84% (or a retention ratio of 16%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Johnson Chemical Pharmaceutical Works 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, Johnson Chemical Pharmaceutical Works' performance is quite a big let-down. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Johnson Chemical Pharmaceutical Works' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you’re looking to trade Johnson Chemical Pharmaceutical Works, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.