Most readers would already be aware that Wanbangde Pharmaceutical Holding Group's (SZSE:002082) stock increased significantly by 33% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Wanbangde Pharmaceutical Holding Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Wanbangde Pharmaceutical Holding Group is:
2.6% = CN¥71m ÷ CN¥2.8b (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¥0.03 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 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.
Wanbangde Pharmaceutical Holding Group's Earnings Growth And 2.6% ROE
It is hard to argue that Wanbangde Pharmaceutical Holding Group's ROE is much good in and of itself. Even compared to the average industry ROE of 7.7%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 36% seen by Wanbangde Pharmaceutical Holding Group was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.
So, as a next step, we compared Wanbangde Pharmaceutical Holding Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.1% over the last few years.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 002082? You can find out in our latest intrinsic value infographic research report
Is Wanbangde Pharmaceutical Holding Group Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 80% (implying that 20% of the profits are retained), most of Wanbangde Pharmaceutical Holding Group's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Wanbangde Pharmaceutical Holding Group by visiting our risks dashboard for free on our platform here.
Moreover, Wanbangde Pharmaceutical Holding Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Conclusion
Overall, we would be extremely cautious before making any decision on Wanbangde Pharmaceutical Holding Group. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Wanbangde Pharmaceutical Holding Group'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.
