It is hard to get excited after looking at Zhejiang Jolly PharmaceuticalLTD's (SZSE:300181) recent performance, when its stock has declined 9.4% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Zhejiang Jolly PharmaceuticalLTD's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Jolly PharmaceuticalLTD is:

18% = CN¥489m ÷ CN¥2.7b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zhejiang Jolly PharmaceuticalLTD's Earnings Growth And 18% ROE

To begin with, Zhejiang Jolly PharmaceuticalLTD seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.6%. Probably as a result of this, Zhejiang Jolly PharmaceuticalLTD was able to see an impressive net income growth of 47% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Zhejiang Jolly PharmaceuticalLTD's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.6%.

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 Zhejiang Jolly PharmaceuticalLTD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Jolly PharmaceuticalLTD Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 61% (implying that it keeps only 39% of profits) for Zhejiang Jolly PharmaceuticalLTD suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Zhejiang Jolly PharmaceuticalLTD has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Zhejiang Jolly PharmaceuticalLTD's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Zhejiang Jolly PharmaceuticalLTD'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.