Stock Analysis

China Chemical & Pharmaceutical Co., Ltd.'s (TPE:1701) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

TWSE:1701
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Most readers would already know that China Chemical & Pharmaceutical's (TPE:1701) stock increased by 2.7% over the past week. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study China Chemical & Pharmaceutical's 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for China Chemical & Pharmaceutical

How Do You Calculate Return On Equity?

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 China Chemical & Pharmaceutical is:

8.1% = NT$535m ÷ NT$6.6b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.08.

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. 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.

China Chemical & Pharmaceutical's Earnings Growth And 8.1% ROE

At first glance, China Chemical & Pharmaceutical's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.1%, we may spare it some thought. Having said that, China Chemical & Pharmaceutical has shown a modest net income growth of 5.9% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between China Chemical & Pharmaceutical's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.9% in the same period.

past-earnings-growth
TSEC:1701 Past Earnings Growth February 24th 2021

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about China Chemical & Pharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Chemical & Pharmaceutical Making Efficient Use Of Its Profits?

While China Chemical & Pharmaceutical has a three-year median payout ratio of 58% (which means it retains 42% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, China Chemical & Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we feel that China Chemical & Pharmaceutical certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on China Chemical & Pharmaceutical and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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