Tianjin Pharmaceutical Da Ren Tang Group's (SGX:T14) stock is up by a considerable 5.1% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Tianjin Pharmaceutical Da Ren Tang Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tianjin Pharmaceutical Da Ren Tang Group is:
12% = CN¥856m ÷ CN¥6.9b (Based on the trailing twelve months to September 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.12 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Tianjin Pharmaceutical Da Ren Tang Group's Earnings Growth And 12% ROE
At first glance, Tianjin Pharmaceutical Da Ren Tang Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.3%. Probably as a result of this, Tianjin Pharmaceutical Da Ren Tang Group was able to see a decent growth of 12% over the last five years.
As a next step, we compared Tianjin Pharmaceutical Da Ren Tang Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 11% in the same period.
Earnings growth is a huge factor in stock valuation. 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 Tianjin Pharmaceutical Da Ren Tang Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Tianjin Pharmaceutical Da Ren Tang Group Using Its Retained Earnings Effectively?
Tianjin Pharmaceutical Da Ren Tang Group has a three-year median payout ratio of 37%, which implies that it retains the remaining 63% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Moreover, Tianjin Pharmaceutical Da Ren Tang Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Overall, we are quite pleased with Tianjin Pharmaceutical Da Ren Tang Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Tianjin Pharmaceutical Da Ren Tang Group visit our risks dashboard for free.
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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.
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