Jiangsu Sinopep-Allsino Biopharmaceutical (SHSE:688076) has had a great run on the share market with its stock up by a significant 33% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Jiangsu Sinopep-Allsino Biopharmaceutical's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

ROE 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 Jiangsu Sinopep-Allsino Biopharmaceutical is:

9.3% = CN¥211m ÷ CN¥2.3b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Jiangsu Sinopep-Allsino Biopharmaceutical's Earnings Growth And 9.3% ROE

At first glance, Jiangsu Sinopep-Allsino Biopharmaceutical's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 7.6% doesn't go unnoticed by us. Particularly, the substantial 24% net income growth seen by Jiangsu Sinopep-Allsino Biopharmaceutical over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Jiangsu Sinopep-Allsino Biopharmaceutical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.2%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 688076 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Jiangsu Sinopep-Allsino Biopharmaceutical Making Efficient Use Of Its Profits?

The three-year median payout ratio for Jiangsu Sinopep-Allsino Biopharmaceutical is 33%, which is moderately low. The company is retaining the remaining 67%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangsu Sinopep-Allsino Biopharmaceutical is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Jiangsu Sinopep-Allsino Biopharmaceutical only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, we are pretty happy with Jiangsu Sinopep-Allsino Biopharmaceutical's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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