Teyi Pharmaceutical GroupLtd's (SZSE:002728) stock up by 1.9% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Teyi Pharmaceutical GroupLtd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Teyi Pharmaceutical GroupLtd

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Teyi Pharmaceutical GroupLtd is:

19% = CN¥269m ÷ CN¥1.4b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.19 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Teyi Pharmaceutical GroupLtd's Earnings Growth And 19% ROE

To begin with, Teyi Pharmaceutical GroupLtd seems to have a respectable ROE. Especially when compared to the industry average of 9.1% the company's ROE looks pretty impressive. Yet, Teyi Pharmaceutical GroupLtd has posted measly growth of 4.5% over the past five years. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Teyi Pharmaceutical GroupLtd's reported growth was lower than the industry growth of 10% over the last few years, which is not something we like to see.

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 Teyi Pharmaceutical GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Teyi Pharmaceutical GroupLtd Making Efficient Use Of Its Profits?

Teyi Pharmaceutical GroupLtd's very high three-year median payout ratio of 117% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. This is indicative of risk. To know the 2 risks we have identified for Teyi Pharmaceutical GroupLtd visit our risks dashboard for free.

Moreover, Teyi Pharmaceutical GroupLtd has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Teyi Pharmaceutical GroupLtd's performance. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Teyi 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.