Hangzhou Bio-Sincerity Pharma-TechLtd (SZSE:301096) has had a rough three months with its share price down 38%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Hangzhou Bio-Sincerity Pharma-TechLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Hangzhou Bio-Sincerity Pharma-TechLtd is:

10% = CN¥287m ÷ CN¥2.8b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Hangzhou Bio-Sincerity Pharma-TechLtd's Earnings Growth And 10% ROE

At first glance, Hangzhou Bio-Sincerity Pharma-TechLtd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.6%, is definitely interesting. Especially when you consider Hangzhou Bio-Sincerity Pharma-TechLtd's exceptional 39% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Hangzhou Bio-Sincerity Pharma-TechLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 22% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hangzhou Bio-Sincerity Pharma-TechLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Hangzhou Bio-Sincerity Pharma-TechLtd Making Efficient Use Of Its Profits?

Hangzhou Bio-Sincerity Pharma-TechLtd's three-year median payout ratio is a pretty moderate 36%, meaning the company retains 64% of its income. By the looks of it, the dividend is well covered and Hangzhou Bio-Sincerity Pharma-TechLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Hangzhou Bio-Sincerity Pharma-TechLtd 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.

Summary

In total, we are pretty happy with Hangzhou Bio-Sincerity Pharma-TechLtd's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.