PharmaBlock Sciences (Nanjing) (SZSE:300725) has had a rough week with its share price down 6.5%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to PharmaBlock Sciences (Nanjing)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for PharmaBlock Sciences (Nanjing) is:

7.8% = CN¥219m ÷ CN¥2.8b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

PharmaBlock Sciences (Nanjing)'s Earnings Growth And 7.8% ROE

On the face of it, PharmaBlock Sciences (Nanjing)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.2%. On the other hand, PharmaBlock Sciences (Nanjing) reported a moderate 19% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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 compared PharmaBlock Sciences (Nanjing)'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 11% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is PharmaBlock Sciences (Nanjing) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PharmaBlock Sciences (Nanjing) Efficiently Re-investing Its Profits?

In PharmaBlock Sciences (Nanjing)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.6% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Additionally, PharmaBlock Sciences (Nanjing) has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that PharmaBlock Sciences (Nanjing) has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.