It is hard to get excited after looking at Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd's (SZSE:301130) recent performance, when its stock has declined 37% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company's financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You 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 Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd is:

5.1% = CN¥50m ÷ CN¥974m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

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

Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd's Earnings Growth And 5.1% ROE

When you first look at it, Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 8.5%, the company's ROE leaves us feeling even less enthusiastic. As a result, Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 11% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd Using Its Retained Earnings Effectively?

Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd's low three-year median payout ratio of 22%, (meaning the company retains78% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Only recently, Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd. 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. 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 Jilin Province Xidian Pharmaceutical Sci-Tech DevelopmentLtd'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.