Beijing Tong Ren Tang Chinese Medicine HKG:3613 has been a huge success in the stock market as its stock is up 7.3% over the past week. As most people know, fundamentals usually guide long-term market price movements, so we decided to take a look at the company’s key financial indicators today to determine if they had any role to play in the recent price movement. In particular, we will pay attention to Beijing Tong Ren Tang Chinese medicine ROE today.
Return on equity or return on equity is a useful tool for evaluating how effectively a company is generating returns on the investment it has received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its capital.
How do you calculate return on equity?
The return on equity formula he is:
Return on Equity = Net Profit (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, the rules of engagement for Beijing Tong Ren Tang Chinese Medicine are:
17% = HK$599m ÷ HK$3.5b (based on the subsequent twelve months to June 2022).
“Return” refers to the company’s earnings over the past year. One way to visualize this is that for every 1 HK dollar of shareholder capital it has, the company generated a profit of 0.17 Hong Kong dollars.
Why is return on equity important to earnings growth?
So far, we have learned that return on equity is a measure of a company’s profitability. We now need to assess how much profit the company reinvests or “keeps” for future growth which then gives us an idea of the company’s growth potential. In general, other things being equal, companies with high return on equity and retained earnings have a higher growth rate than companies that do not share these traits.
Beijing Tong Ren Tang Chinese Medicine’s profit growth and 17% return on equity
First of all, the rules of engagement for Beijing’s Chinese medicine Tong Ren Tang seem acceptable. The company’s ROE looks impressive, especially when compared to the industry average of 10%. However, for some reason, the higher returns were not reflected in Beijing Tong Ren Tang Chinese Medicine’s meager five-year average net income growth of 2.7%. This is a bit unexpected from a company that has a high rate of return. Such a scenario is likely to occur when a company pays a large portion of its earnings as dividends, or when it faces competitive pressures.
Then, when comparing with the industry’s net income growth, we find that the growth of China’s Beijing Tong Ren Tang Chinese medicine was lower than the industry’s 8.8% growth in the same period, which is something we don’t like to see.
Earnings growth is an important metric to consider when evaluating stocks. What investors need to determine next is whether, or not, the expected earnings growth is actually built into the stock price. This then helps them decide whether to position the stock for a bright or bleak future. If you are wondering about the evaluation of Chinese medicine in Beijing Tong Ren Tang, check it out This measure of the price-earnings ratiocompared to its manufacture.
Is Beijing Tong Ren Tang Chinese Medicine Using Its Retained Earnings Effectively?
Despite having a moderate three-year average payout ratio of 37% (which means the company retains the remaining 63% of its income), Beijing Tong Ren Tang Chinese Medicine’s dividend growth has been very low. So there could be another explanation in this regard. For example, a company’s business may deteriorate.
Moreover, Beijing Tong Ren Tang Chinese Medicine has been paying dividends for nine years, which is a long period of time, indicating that management must have realized that shareholders prefer dividends over dividend growth.
Overall, we feel that Beijing Tong Ren Tang’s Chinese medicine definitely has some positive factors to consider. Although we are disappointed to see the lack of growth in earnings even despite the high return on equity and high reinvestment rate. We believe that there may be some external factors that could have a negative impact on the business. That being the case, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To learn more about the company’s future earnings growth forecast, take a look at this Free A report on analysts’ forecasts for the company to find out more.
Evaluation is complex, but we help simplify it.
Find out if Chinese medicine Tong Ren Tang Beijing potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks, warnings, dividends, insider transactions and financial soundness.
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This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.