It is hard to get excited after looking at Shanghai Fosun Pharmaceutical (Group)'s (SHSE:600196) recent performance, when its stock has declined 5.7% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Shanghai Fosun Pharmaceutical (Group)'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 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 Shanghai Fosun Pharmaceutical (Group) is:

4.5% = CN¥2.6b ÷ CN¥58b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned 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¥0.04 in profit.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shanghai Fosun Pharmaceutical (Group)'s Earnings Growth And 4.5% ROE

As you can see, Shanghai Fosun Pharmaceutical (Group)'s ROE looks pretty weak. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. Therefore, Shanghai Fosun Pharmaceutical (Group)'s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Shanghai Fosun Pharmaceutical (Group)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.4% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Shanghai Fosun Pharmaceutical (Group)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Fosun Pharmaceutical (Group) Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 30% (meaning the company retains70% of profits) in the last three-year period, Shanghai Fosun Pharmaceutical (Group)'s earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Shanghai Fosun Pharmaceutical (Group) has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about Shanghai Fosun Pharmaceutical (Group). While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

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