Tianjin Pharmaceutical Da Ren Tang Group (SGX:T14) has had a great run on the share market with its stock up by a significant 85% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Tianjin Pharmaceutical Da Ren Tang Group's ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group
How Do You 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 Tianjin Pharmaceutical Da Ren Tang Group is:
15% = CN¥1.1b ÷ CN¥6.9b (Based on the trailing twelve months to March 2023).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 in profit.
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. Assuming all 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 when compared to companies that don't have the same features.
Tianjin Pharmaceutical Da Ren Tang Group's Earnings Growth And 15% ROE
To begin with, Tianjin Pharmaceutical Da Ren Tang Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.4%. This probably laid the ground for Tianjin Pharmaceutical Da Ren Tang Group's moderate 12% net income growth seen over the past five years.
Next, on comparing Tianjin Pharmaceutical Da Ren Tang Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One 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 prospects. So, you may want to check if Tianjin Pharmaceutical Da Ren Tang Group is trading on a high P/E or a low P/E, relative to its industry.