It is hard to get excited after looking at Beijing Wandong Medical TechnologyLtd's (SHSE:600055) recent performance, when its stock has declined 15% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company's financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Beijing Wandong Medical TechnologyLtd's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Beijing Wandong Medical TechnologyLtd is:
4.0% = CN¥191m ÷ CN¥4.8b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Beijing Wandong Medical TechnologyLtd's Earnings Growth And 4.0% ROE
It is quite clear that Beijing Wandong Medical TechnologyLtd's ROE is rather low. Even when compared to the industry average of 10.0%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Beijing Wandong Medical TechnologyLtd's very little net income growth of 2.4% over the past five years.
Next, on comparing with the industry net income growth, we found that Beijing Wandong Medical TechnologyLtd's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Beijing Wandong Medical TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Beijing Wandong Medical TechnologyLtd Efficiently Re-investing Its Profits?
Despite having a moderate three-year median payout ratio of 36% (implying that the company retains the remaining 64% of its income), Beijing Wandong Medical TechnologyLtd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Beijing Wandong Medical TechnologyLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
Overall, we have mixed feelings about Beijing Wandong Medical TechnologyLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Beijing Wandong Medical TechnologyLtd by visiting our risks dashboard for free on our platform here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.