It is hard to get excited after looking at Enwei Pharmaceutical's (SZSE:301331) recent performance, when its stock has declined 35% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Enwei Pharmaceutical's ROE in this article.
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 Do You Calculate Return On Equity?
ROE 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 Enwei Pharmaceutical is:
8.2% = CN¥91m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Enwei Pharmaceutical's Earnings Growth And 8.2% ROE
At first glance, Enwei Pharmaceutical's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.5%. Still, Enwei Pharmaceutical has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.
As a next step, we compared Enwei Pharmaceutical's net income growth with the industry and discovered that the industry saw an average growth of 11% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 301331? You can find out in our latest intrinsic value infographic research report
Is Enwei Pharmaceutical Making Efficient Use Of Its Profits?
Enwei Pharmaceutical has a three-year median payout ratio as high as 118% meaning that the company is paying a dividend which is beyond its means. The absence of growth in Enwei Pharmaceutical's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. This is quite a risky position to be in. You can see the 3 risks we have identified for Enwei Pharmaceutical by visiting our risks dashboard for free on our platform here.
In addition, Enwei Pharmaceutical only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.
Summary
In total, we would have a hard think before deciding on any investment action concerning Enwei Pharmaceutical. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Enwei Pharmaceutical's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.
