With its stock down 11% over the past month, it is easy to disregard Jiang Zhong PharmaceuticalLtd (SHSE:600750). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Jiang Zhong PharmaceuticalLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

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 Jiang Zhong PharmaceuticalLtd is:

17% = CN¥791m ÷ CN¥4.8b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Jiang Zhong PharmaceuticalLtd's Earnings Growth And 17% ROE

To start with, Jiang Zhong PharmaceuticalLtd's ROE looks acceptable. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. This probably laid the ground for Jiang Zhong PharmaceuticalLtd's moderate 9.1% net income growth seen over the past five years.

As a next step, we compared Jiang Zhong PharmaceuticalLtd'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 9.2% in the same period.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is 600750 worth today? The intrinsic value infographic in our free research report helps visualize whether 600750 is currently mispriced by the market.

Is Jiang Zhong PharmaceuticalLtd Using Its Retained Earnings Effectively?

Jiang Zhong PharmaceuticalLtd's high three-year median payout ratio of 110% suggests that the company is paying out more to its shareholders than what it is making. Still the company's earnings have grown respectably. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates.

Besides, Jiang Zhong PharmaceuticalLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 101%. Regardless, the future ROE for Jiang Zhong PharmaceuticalLtd is predicted to rise to 24% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Jiang Zhong PharmaceuticalLtd has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com