Most readers would already be aware that PharmaBlock Sciences (Nanjing)'s (SZSE:300725) stock increased significantly by 46% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to PharmaBlock Sciences (Nanjing)'s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 PharmaBlock Sciences (Nanjing) is:

6.0% = CN¥175m ÷ CN¥2.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of PharmaBlock Sciences (Nanjing)'s Earnings Growth And 6.0% ROE

At first glance, PharmaBlock Sciences (Nanjing)'s ROE doesn't look very promising. Next, when compared to the average industry ROE of 7.7%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by PharmaBlock Sciences (Nanjing) over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared PharmaBlock Sciences (Nanjing)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.1% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about PharmaBlock Sciences (Nanjing)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is PharmaBlock Sciences (Nanjing) Efficiently Re-investing Its Profits?

PharmaBlock Sciences (Nanjing)'s low three-year median payout ratio of 7.2%, (meaning the company retains93% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, PharmaBlock Sciences (Nanjing) has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by PharmaBlock Sciences (Nanjing) can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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 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.