Sino BiologicalInc (SZSE:301047) has had a rough three months with its share price down 10%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Sino BiologicalInc'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Sino BiologicalInc

How Is ROE Calculated?

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 Sino BiologicalInc is:

4.0% = CN¥247m ÷ CN¥6.2b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. 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.

Sino BiologicalInc's Earnings Growth And 4.0% ROE

It is quite clear that Sino BiologicalInc's ROE is rather low. Not just that, even compared to the industry average of 6.7%, the company's ROE is entirely unremarkable. As a result, Sino BiologicalInc's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Sino BiologicalInc's net income growth with the industry and found that the average industry growth rate was 13% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sino BiologicalInc's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sino BiologicalInc Making Efficient Use Of Its Profits?

Sino BiologicalInc has a three-year median payout ratio as high as 105% meaning that the company is paying a dividend which is beyond its means. The absence in growth is therefore not surprising. Its usually very hard to sustain dividend payments that are higher than reported profits. That's a huge risk in our books. To know the 3 risks we have identified for Sino BiologicalInc visit our risks dashboard for free.

Additionally, Sino BiologicalInc started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

On the whole, Sino BiologicalInc's performance is quite a big let-down. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.