Most readers would already be aware that Jiangsu Kanion PharmaceuticalLtd's (SHSE:600557) stock increased significantly by 15% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Jiangsu Kanion PharmaceuticalLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

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 Jiangsu Kanion PharmaceuticalLtd is:

10% = CN¥551m ÷ CN¥5.5b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.10 in profit.

What Is The Relationship Between ROE And 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 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.

Jiangsu Kanion PharmaceuticalLtd's Earnings Growth And 10% ROE

When you first look at it, Jiangsu Kanion PharmaceuticalLtd's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 7.7% which we definitely can't overlook. Yet, Jiangsu Kanion PharmaceuticalLtd has posted measly growth of 3.7% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

Next, on comparing with the industry net income growth, we found that Jiangsu Kanion PharmaceuticalLtd's reported growth was lower than the industry growth of 9.2% over the last few years, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 600557 worth today? The intrinsic value infographic in our free research report helps visualize whether 600557 is currently mispriced by the market.

Is Jiangsu Kanion PharmaceuticalLtd Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 28% (implying that the company retains the remaining 72% of its income), Jiangsu Kanion PharmaceuticalLtd's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Jiangsu Kanion PharmaceuticalLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 31%. Still, forecasts suggest that Jiangsu Kanion PharmaceuticalLtd's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that Jiangsu Kanion PharmaceuticalLtd certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.