Is the weak stock of Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG: 874) a sign that the market could be wrong given its strong financial outlook?

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Guangzhou Baiyunshan Pharmaceutical Holdings (HKG: 874) had a rough three-month period with its share price down 4.8%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study the ROE of Guangzhou Baiyunshan Pharmaceutical Holdings in this article.

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

Check out our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings

How do you calculate return on equity?

the formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of Guangzhou Baiyunshan Pharmaceutical Holdings is:

12% = CN ¥ 3.8b ÷ CN ¥ 31b (Based on the last twelve months up to September 2021).

The “return” is the annual profit. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.12 in profit.

What is the relationship between ROE and profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything 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 than companies that do not have the same characteristics.

Guangzhou Baiyunshan Pharmaceutical Holdings profit growth and 12% ROE

For starters, the ROE of Guangzhou Baiyunshan Pharmaceutical Holdings seems acceptable. Even compared to the industry average of 11%, the company’s ROE looks quite decent. This probably partly explains the moderate 13% growth of Guangzhou Baiyunshan Pharmaceutical Holdings over the past five years, among other factors.

As the next step, we compared the net income growth of Guangzhou Baiyunshan Pharmaceutical Holdings with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 11% over the course of the same period.

SEHK: 874 Past profit growth on December 18, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering about the valuation of Guangzhou Baiyunshan Pharmaceutical Holdings, check out this gauge of its price-to-earnings ratio, relative to its industry.

Guangzhou Baiyunshan Pharmaceutical Holdings Efficiently Using Retained Earnings?

Guangzhou Baiyunshan Pharmaceutical Holdings’ three-year median payout ratio to shareholders is 25% (implying that it keeps 75% of its revenue), which is lower, so it looks like management is heavily reinvesting profits to develop its activity.

In addition, Guangzhou Baiyunshan Pharmaceutical Holdings has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders.

Summary

Overall, we believe that the performance of Guangzhou Baiyunshan Pharmaceutical Holdings has been quite good. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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