Tianjin Chase Sun PharmaceuticalLtd (SZSE:300026) has had a great run on the share market with its stock up by a significant 24% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Tianjin Chase Sun PharmaceuticalLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Tianjin Chase Sun PharmaceuticalLtd is:

2.0% = CN¥182m ÷ CN¥9.0b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

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 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.

A Side By Side comparison of Tianjin Chase Sun PharmaceuticalLtd's Earnings Growth And 2.0% ROE

As you can see, Tianjin Chase Sun PharmaceuticalLtd's ROE looks pretty weak. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. Therefore, Tianjin Chase Sun PharmaceuticalLtd'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 Tianjin Chase Sun PharmaceuticalLtd's net income growth with the industry and discovered that the industry saw an average growth of 9.1% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Tianjin Chase Sun PharmaceuticalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tianjin Chase Sun PharmaceuticalLtd Efficiently Re-investing Its Profits?

Tianjin Chase Sun PharmaceuticalLtd's low three-year median payout ratio of 18% (implying that the company keeps82% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Moreover, Tianjin Chase Sun PharmaceuticalLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Tianjin Chase Sun PharmaceuticalLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.