Baotou Dongbao Bio-TechLtd's (SZSE:300239) stock is up by a considerable 11% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Baotou Dongbao Bio-TechLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Baotou Dongbao Bio-TechLtd

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 Baotou Dongbao Bio-TechLtd is:

6.9% = CN¥125m ÷ CN¥1.8b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 in profit.

Why Is ROE Important For 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 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.

Baotou Dongbao Bio-TechLtd's Earnings Growth And 6.9% ROE

On the face of it, Baotou Dongbao Bio-TechLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.0%, we may spare it some thought. Particularly, the exceptional 35% net income growth seen by Baotou Dongbao Bio-TechLtd over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Baotou Dongbao Bio-TechLtd's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Baotou Dongbao Bio-TechLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Baotou Dongbao Bio-TechLtd Making Efficient Use Of Its Profits?

Baotou Dongbao Bio-TechLtd's ' three-year median payout ratio is on the lower side at 13% implying that it is retaining a higher percentage (87%) of its profits. So it looks like Baotou Dongbao Bio-TechLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Baotou Dongbao Bio-TechLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Baotou Dongbao Bio-TechLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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.