Most readers would already be aware that PharmaBlock Sciences (Nanjing)'s (SZSE:300725) stock increased significantly by 13% over the past month. 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. In this article, we decided to focus on PharmaBlock Sciences (Nanjing)'s ROE.

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:

6.6% = CN¥189m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.07.

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. 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 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.

PharmaBlock Sciences (Nanjing)'s Earnings Growth And 6.6% ROE

At first glance, PharmaBlock Sciences (Nanjing)'s ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.6%. Having said that, PharmaBlock Sciences (Nanjing) has shown a modest net income growth of 10% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing PharmaBlock Sciences (Nanjing)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.2% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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) Making Efficient Use Of Its Profits?

In PharmaBlock Sciences (Nanjing)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.6% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Moreover, PharmaBlock Sciences (Nanjing) is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

Overall, we feel that PharmaBlock Sciences (Nanjing) certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com