It is hard to get excited after looking at Livzon Pharmaceutical Group's (SZSE:000513) recent performance, when its stock has declined 10% 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 Livzon Pharmaceutical Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 Livzon Pharmaceutical Group is:

14% = CN¥2.1b ÷ CN¥15b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.14.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Livzon Pharmaceutical Group's Earnings Growth And 14% ROE

At first glance, Livzon Pharmaceutical Group seems to have a decent ROE. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. This probably laid the ground for Livzon Pharmaceutical Group's moderate 9.0% net income growth seen over the past five years.

As a next step, we compared Livzon Pharmaceutical Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.0% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Livzon Pharmaceutical Group is trading on a high P/E or a low P/E, relative to its industry.

Is Livzon Pharmaceutical Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Livzon Pharmaceutical Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

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

Conclusion

In total, we are pretty happy with Livzon Pharmaceutical Group's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.