With its stock down 23% over the past month, it is easy to disregard PKU HealthCareLtd (SZSE:000788). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on PKU HealthCareLtd's ROE.
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 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 PKU HealthCareLtd is:
3.9% = CN¥56m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).
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¥0.04 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
A Side By Side comparison of PKU HealthCareLtd's Earnings Growth And 3.9% ROE
As you can see, PKU HealthCareLtd's ROE looks pretty weak. Even compared to the average industry ROE of 8.5%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to PKU HealthCareLtd's very little net income growth of 2.8% over the past five years.
Next, on comparing with the industry net income growth, we found that PKU HealthCareLtd's reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about PKU HealthCareLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is PKU HealthCareLtd Efficiently Re-investing Its Profits?
While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
Overall, we have mixed feelings about PKU HealthCareLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.