The fundamentals of Sinco Pharmaceuticals Holdings Limited (HKG:6833) look quite solid: could the market be wrong about the stock?

It’s hard to get excited after looking at the recent performance of Sinco Pharmaceuticals Holdings (HKG:6833), as its stock has fallen 33% in the past three months. However, a closer look at his sound finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. Specifically, we decided to study the ROE of Sinco Pharmaceuticals Holdings in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Sinco Pharmaceuticals Holdings

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Sinco Pharmaceuticals Holdings is:

36% = CN¥135 million ÷ CN¥375 million (based on the last twelve months to December 2021).

The “return” is the annual profit. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.36.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Sinco Pharmaceuticals Holdings earnings growth and ROE of 36%

For starters, Sinco Pharmaceuticals Holdings has a pretty high ROE, which is interesting. Second, a comparison to the industry-reported average ROE of 7.3% also does not go unnoticed for us. Under these circumstances, a considerable growth in the five-year net profit of Sinco Pharmaceuticals Holdings of 47% was to be expected.

In a next step, we benchmarked Sinco Pharmaceuticals Holdings’ net income growth with the industry, and fortunately, we found that the growth seen by the company is above the industry average growth of 8.5 %.

SEHK: 6833 Past Earnings Growth June 20, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Sinco Pharmaceuticals Holdings is trading on a high P/E or a low P/E, relative to its industry.

Does Sinco Pharmaceuticals Holdings Use Retained Earnings Effectively?

Since Sinco Pharmaceuticals Holdings does not pay any dividends to its shareholders, we infer that the company has reinvested all its profits to grow its business.

Conclusion

Overall, we believe Sinco Pharmaceuticals Holdings’ performance has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Not to mention that stock price results also depend on the potential risks a company may face. It is therefore important for investors to be aware of the risks associated with the business. You can see the 2 risks we have identified for Sinco Pharmaceuticals Holdings by visiting our risk dashboard for free on our platform here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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