It is hard to get excited after looking at Guangzhou Wondfo BiotechLtd's (SZSE:300482) recent performance, when its stock has declined 18% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Guangzhou Wondfo BiotechLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Guangzhou Wondfo BiotechLtd is:

9.5% = CN¥530m ÷ CN¥5.6b (Based on the trailing twelve months to September 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¥0.10.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Guangzhou Wondfo BiotechLtd's Earnings Growth And 9.5% ROE

At first glance, Guangzhou Wondfo BiotechLtd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.1%, is definitely interesting. Still, Guangzhou Wondfo BiotechLtd has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay flat.

We then compared Guangzhou Wondfo BiotechLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.1% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guangzhou Wondfo BiotechLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangzhou Wondfo BiotechLtd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 35% (or a retention ratio of 65%), Guangzhou Wondfo BiotechLtd hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Guangzhou Wondfo BiotechLtd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Guangzhou Wondfo BiotechLtd has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.