Is Lotus Pharmaceutical Co., Ltd.'s (TWSE:1795) Latest Stock Performance Being Led By Its Strong Fundamentals?

Lotus Pharmaceutical's (TWSE:1795) stock up by 3.1% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Lotus Pharmaceutical's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Lotus 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 Lotus Pharmaceutical is:

21% = NT$4.3b ÷ NT$20b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Lotus Pharmaceutical's Earnings Growth And 21% ROE

To begin with, Lotus Pharmaceutical has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 6.6% which is quite remarkable. So, the substantial 40% net income growth seen by Lotus Pharmaceutical over the past five years isn't overly surprising.

We then compared Lotus Pharmaceutical's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.2% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Lotus Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lotus Pharmaceutical Making Efficient Use Of Its Profits?

Lotus Pharmaceutical's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. By the looks of it, the dividend is well covered and Lotus Pharmaceutical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Lotus Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

In total, we are pretty happy with Lotus Pharmaceutical'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, 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.