Nanjing King-Friend Biochemical PharmaceuticalLtd (SHSE:603707) has had a rough month with its share price down 12%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Nanjing King-Friend Biochemical PharmaceuticalLtd's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To Calculate Return On Equity?

Return on equity 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 Nanjing King-Friend Biochemical PharmaceuticalLtd is:

15% = CN¥1.0b ÷ CN¥6.8b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.15 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Nanjing King-Friend Biochemical PharmaceuticalLtd's Earnings Growth And 15% ROE

To begin with, Nanjing King-Friend Biochemical PharmaceuticalLtd seems to have a respectable ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This probably laid the ground for Nanjing King-Friend Biochemical PharmaceuticalLtd's moderate 19% net income growth seen over the past five years.

As a next step, we compared Nanjing King-Friend Biochemical PharmaceuticalLtd'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 11%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Nanjing King-Friend Biochemical PharmaceuticalLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Nanjing King-Friend Biochemical PharmaceuticalLtd Making Efficient Use Of Its Profits?

Nanjing King-Friend Biochemical PharmaceuticalLtd's three-year median payout ratio to shareholders is 17% (implying that it retains 83% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Nanjing King-Friend Biochemical PharmaceuticalLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Nanjing King-Friend Biochemical PharmaceuticalLtd'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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.