WuXi AppTec (SHSE:603259) has had a great run on the share market with its stock up by a significant 38% over the last three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on WuXi AppTec's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 WuXi AppTec is:

15% = CN¥8.2b ÷ CN¥56b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.15 in profit.

Why Is ROE Important For 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. 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.

WuXi AppTec's Earnings Growth And 15% ROE

To begin with, WuXi AppTec seems to have a respectable ROE. Especially when compared to the industry average of 6.1% the company's ROE looks pretty impressive. Probably as a result of this, WuXi AppTec was able to see an impressive net income growth of 31% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared WuXi AppTec'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 17%.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 603259 worth today? The intrinsic value infographic in our free research report helps visualize whether 603259 is currently mispriced by the market.

Is WuXi AppTec Efficiently Re-investing Its Profits?

WuXi AppTec's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and WuXi AppTec is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, WuXi AppTec is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 30% of its profits over the next three years. As a result, WuXi AppTec's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Summary

On the whole, we feel that WuXi AppTec's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.