Guilin Sanjin Pharmaceutical's (SZSE:002275) stock is up by 9.7% over the past three months. 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. Particularly, we will be paying attention to Guilin Sanjin Pharmaceutical's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To 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 Guilin Sanjin Pharmaceutical is:

11% = CN¥322m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Guilin Sanjin Pharmaceutical's Earnings Growth And 11% ROE

To start with, Guilin Sanjin Pharmaceutical's ROE looks acceptable. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Guilin Sanjin Pharmaceutical in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 9.2% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. What is 002275 worth today? The intrinsic value infographic in our free research report helps visualize whether 002275 is currently mispriced by the market.

Is Guilin Sanjin Pharmaceutical Using Its Retained Earnings Effectively?

Guilin Sanjin Pharmaceutical has a three-year median payout ratio as high as 127% meaning that the company is paying a dividend which is beyond its means. The absence of growth in Guilin Sanjin Pharmaceutical's earnings therefore, doesn't come as a surprise. Paying a dividend higher than reported profits is not a sustainable move. This is quite a risky position to be in.

Moreover, Guilin Sanjin Pharmaceutical has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Guilin Sanjin Pharmaceutical. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.