What is Behind Sino Biopharmaceutical Limited’s (HKG:1177) Superior ROE?
This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Sino Biopharmaceutical Limited (HKG:1177) stock.
Sino Biopharmaceutical Limited (HKG:1177) delivered an ROE of 16.16% over the past 12 months, which is an impressive feat relative to its industry average of 13.71% during the same period. While the impressive ratio tells us that 1177 has made significant profits from little equity capital, ROE doesn’t tell us if 1177 has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of 1177’s ROE. Check out our latest analysis for Sino Biopharmaceutical
What you must know about ROE
Return on Equity (ROE) weighs Sino Biopharmaceutical’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Sino Biopharmaceutical’s equity capital deployed. Its cost of equity is 8.44%. Given a positive discrepancy of 7.72% between return and cost, this indicates that Sino Biopharmaceutical pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Sino Biopharmaceutical can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Sino Biopharmaceutical currently has. At 12.50%, Sino Biopharmaceutical’s debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Sino Biopharmaceutical’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Sino Biopharmaceutical, I’ve put together three relevant aspects you should further research:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Sino Biopharmaceutical worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Sino Biopharmaceutical is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Sino Biopharmaceutical? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
