It is hard to get excited after looking at Changchun BCHT Biotechnology's (SHSE:688276) recent performance, when its stock has declined 27% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Changchun BCHT Biotechnology's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Changchun BCHT Biotechnology is:

13% = CN¥543m ÷ CN¥4.1b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Changchun BCHT Biotechnology's Earnings Growth And 13% ROE

To begin with, Changchun BCHT Biotechnology seems to have a respectable ROE. Especially when compared to the industry average of 5.8% the company's ROE looks pretty impressive. This certainly adds some context to Changchun BCHT Biotechnology's decent 5.1% net income growth seen over the past five years.

As a next step, we compared Changchun BCHT Biotechnology's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 5.4% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Changchun BCHT Biotechnology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Changchun BCHT Biotechnology Making Efficient Use Of Its Profits?

In Changchun BCHT Biotechnology's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 20% (or a retention ratio of 80%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Changchun BCHT Biotechnology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 19%. Regardless, the future ROE for Changchun BCHT Biotechnology is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Changchun BCHT Biotechnology's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.