Shanghai Serum Bio-Technology (SHSE:688163) has had a rough three months with its share price down 43%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Shanghai Serum Bio-Technology's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Shanghai Serum Bio-Technology is:

5.7% = CN¥61m ÷ CN¥1.1b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. 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 Has ROE Got To Do With 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.

Shanghai Serum Bio-Technology's Earnings Growth And 5.7% ROE

On the face of it, Shanghai Serum Bio-Technology's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.6%. Having said that, Shanghai Serum Bio-Technology has shown a modest net income growth of 5.0% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Shanghai Serum Bio-Technology'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 11% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Shanghai Serum Bio-Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Serum Bio-Technology Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 119% for Shanghai Serum Bio-Technology suggests that the company is paying its shareholders more than what it is earning. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. To know the 2 risks we have identified for Shanghai Serum Bio-Technology visit our risks dashboard for free.

While Shanghai Serum Bio-Technology has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, Shanghai Serum Bio-Technology's performance is quite a big let-down. While no doubt its earnings growth is pretty respectable, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, specially during troubled times. Up till now, we've only made a short study of the company's growth data. To gain further insights into Shanghai Serum Bio-Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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.