SciClone Pharmaceuticals (Holdings) Limited (HKG: 6600) shares recently showed weakness, but finances look strong: Should potential shareholders take the plunge?

With its stock down 30% in the past three months, it’s easy to overlook SciClone Pharmaceuticals (Holdings) (HKG: 6600). However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. In this article, we have decided to focus on the ROE of SciClone Pharmaceuticals (Holdings).

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest review for SciClone Pharmaceuticals (Holdings)

How do you calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE of SciClone Pharmaceuticals (Holdings) is:

40% = CN ¥ 779m ÷ CN ¥ 1.9b (Based on the last twelve months up to June 2021).

“Return” refers to a company’s profits over the past year. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.40 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that 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 the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Profit growth of SciClone Pharmaceuticals (Holdings) and 40% of ROE

For starters, SciClone Pharmaceuticals (Holdings) has a pretty high ROE, which is interesting. In addition, the company’s ROE is 10% above the industry average, which is quite remarkable. As a result, the exceptional 29% growth in net profit of SciClone Pharmaceuticals (Holdings) observed over the past five years is no surprise.

Next, comparing with the industry net income growth, we found that the growth of SciClone Pharmaceuticals (Holdings) is quite high compared to the industry average growth of 9.4% over the same period, which is great to see.

SEHK: 6,600 Past profit growth on September 5, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you are wondering about the valuation of SciClone Pharmaceuticals (Holdings), check out this gauge of its price / earnings ratio, relative to its industry.

Is SciClone Pharmaceuticals (Holdings) Efficiently Using Its Retained Earnings?

Summary

Overall, we are quite happy with the performance of SciClone Pharmaceuticals (Holdings). Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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