Hubei Biocause Heilen Pharmaceutical (SZSE:301211) has had a great run on the share market with its stock up by a significant 43% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Hubei Biocause Heilen Pharmaceutical's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Hubei Biocause Heilen Pharmaceutical is:

4.6% = CN¥106m ÷ CN¥2.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Hubei Biocause Heilen Pharmaceutical's Earnings Growth And 4.6% ROE

It is quite clear that Hubei Biocause Heilen Pharmaceutical's ROE is rather low. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Hubei Biocause Heilen Pharmaceutical's very little net income growth of 3.9% over the past five years.

We then compared Hubei Biocause Heilen Pharmaceutical's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.0% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hubei Biocause Heilen Pharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hubei Biocause Heilen Pharmaceutical Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 68% (that is, the company retains only 32% of its income) over the past three years for Hubei Biocause Heilen Pharmaceutical suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Hubei Biocause Heilen Pharmaceutical only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Hubei Biocause Heilen Pharmaceutical. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. To know the 3 risks we have identified for Hubei Biocause Heilen Pharmaceutical visit our risks dashboard for free.

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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.