CSPC Pharmaceutical Group Limited (HKG: 1093) fundamentals look pretty strong: Could the market be wrong about the stock?
It’s hard to get excited after looking at the recent performance of CSPC Pharmaceutical Group (HKG: 1093), when its stock has fallen 12% in the past three months. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. Specifically, we decided to study the ROE of CSPC Pharmaceutical Group in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest analysis for CSPC Pharmaceutical Group
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for CSPC Pharmaceutical Group is:
24% = CN Â¥ 6.1b Ã· CN Â¥ 25b (Based on the last twelve months up to September 2021).
“Return” refers to a company’s profits over the past year. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.24 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 âwithholdsâ and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Profit growth for the pharmaceutical group CSPC and 24% ROE
For starters, CSPC Pharmaceutical Group has a pretty high ROE, which is interesting. Additionally, the company’s ROE is 11% higher than the industry average, which is quite remarkable. Under these circumstances, CSPC Pharmaceuticals Group’s significant net profit growth of 24% over five years was to be expected.
Then, comparing with the industry net income growth, we found that the growth of CSPC Pharmaceutical Group is quite high compared to the industry average growth of 11% during the same period, which is great to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of CSPC Pharmaceutical Group, check out this gauge of its price / earnings ratio, relative to its industry.
Is the pharmaceutical group CSPC effectively reinvesting its profits?
The three-year median payout ratio for CSPC Pharmaceutical Group is 28%, which is moderately low. The company retains the remaining 72%. This suggests that its dividend is well hedged, and given the high growth we discussed above, it appears that the pharmaceutical group CSPC is reinvesting its profits in an efficient manner.
In addition, CSPC Pharmaceutical Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 30% of its profits over the next three years. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 20%.
Overall, we are quite satisfied with the performance of the CSPC Pharmaceutical Group. Specifically, we like the fact that the company is reinvesting a huge portion of its profits at a high rate of return. This of course enabled the company to experience substantial growth in profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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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 material. Simply Wall St has no position in any of the stocks mentioned.