Dalian BIO-CHEM's (SHSE:603360) stock is up by a considerable 15% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Dalian BIO-CHEM's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Dalian BIO-CHEM is:

19% = CN¥303m ÷ CN¥1.6b (Based on the trailing twelve months to June 2024).

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¥0.19 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. 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 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.

A Side By Side comparison of Dalian BIO-CHEM's Earnings Growth And 19% ROE

At first glance, Dalian BIO-CHEM seems to have a decent ROE. Especially when compared to the industry average of 6.4% the company's ROE looks pretty impressive. This probably laid the ground for Dalian BIO-CHEM's moderate 7.7% net income growth seen over the past five years.

As a next step, we compared Dalian BIO-CHEM'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 6.1%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Dalian BIO-CHEM fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dalian BIO-CHEM Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Dalian BIO-CHEM suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Dalian BIO-CHEM has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Dalian BIO-CHEM's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.