It is hard to get excited after looking at Jiangsu Sinopep-Allsino Biopharmaceutical's (SHSE:688076) recent performance, when its stock has declined 15% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Jiangsu Sinopep-Allsino Biopharmaceutical's ROE.

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 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 Jiangsu Sinopep-Allsino Biopharmaceutical is:

16% = CN¥426m ÷ CN¥2.6b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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¥0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Jiangsu Sinopep-Allsino Biopharmaceutical's Earnings Growth And 16% ROE

To begin with, Jiangsu Sinopep-Allsino Biopharmaceutical seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. Probably as a result of this, Jiangsu Sinopep-Allsino Biopharmaceutical was able to see an impressive net income growth of 33% over the last five years. We reckon that there could also be other factors at play here. 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.

Next, on comparing with the industry net income growth, we found that Jiangsu Sinopep-Allsino Biopharmaceutical's growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.

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 Jiangsu Sinopep-Allsino Biopharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Sinopep-Allsino Biopharmaceutical Efficiently Re-investing Its Profits?

The three-year median payout ratio for Jiangsu Sinopep-Allsino Biopharmaceutical is 32%, which is moderately low. The company is retaining the remaining 68%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Jiangsu Sinopep-Allsino Biopharmaceutical is reinvesting its earnings efficiently.

While Jiangsu Sinopep-Allsino Biopharmaceutical 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 Jiangsu Sinopep-Allsino Biopharmaceutical's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.