Sunflower Pharmaceutical GroupLtd's (SZSE:002737) stock up by 3.8% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Sunflower Pharmaceutical GroupLtd's ROE in this article.

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 To 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 Sunflower Pharmaceutical GroupLtd is:

27% = CN¥1.3b ÷ CN¥4.7b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax 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¥0.27.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Sunflower Pharmaceutical GroupLtd's Earnings Growth And 27% ROE

Firstly, we acknowledge that Sunflower Pharmaceutical GroupLtd has a significantly high ROE. Secondly, even when compared to the industry average of 8.3% the company's ROE is quite impressive. This likely paved the way for the modest 16% net income growth seen by Sunflower Pharmaceutical GroupLtd over the past five years.

We then compared Sunflower Pharmaceutical GroupLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.

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 Sunflower Pharmaceutical GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Sunflower Pharmaceutical GroupLtd Efficiently Re-investing Its Profits?

While Sunflower Pharmaceutical GroupLtd has a three-year median payout ratio of 51% (which means it retains 49% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, Sunflower Pharmaceutical GroupLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Sunflower Pharmaceutical GroupLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Sunflower Pharmaceutical GroupLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.