Liaoning Chengda BiotechnologyLtd (SHSE:688739) has had a great run on the share market with its stock up by a significant 13% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Liaoning Chengda BiotechnologyLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Liaoning Chengda BiotechnologyLtd is:

6.1% = CN¥588m ÷ CN¥9.7b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated 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.

A Side By Side comparison of Liaoning Chengda BiotechnologyLtd's Earnings Growth And 6.1% ROE

When you first look at it, Liaoning Chengda BiotechnologyLtd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.6%. Having said that, Liaoning Chengda BiotechnologyLtd's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Liaoning Chengda BiotechnologyLtd's reported growth was lower than the industry growth of 11% 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. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Liaoning Chengda BiotechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Liaoning Chengda BiotechnologyLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 58% (meaning, the company retains only 42% of profits) for Liaoning Chengda BiotechnologyLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Only recently, Liaoning Chengda BiotechnologyLtd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

On the whole, Liaoning Chengda BiotechnologyLtd's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Liaoning Chengda BiotechnologyLtd'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.