Has the share price of LEPU ScienTech Medical Technology (Shanghai) Co., Ltd. (HKG:2291) struggling due to mixed financial figures?

LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) has had a tough three months, with its share price down 14%. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to pay more attention to the negative aspects. Fundamentals usually drive market outcomes, so it makes sense to study the company’s financials. In this article, we decided to focus on the ROE of LEPU ScienTech Medical Technology (Shanghai).

Return on equity or ROE is an important measure used to assess how efficiently a company’s management is using the company’s capital. Simply put, it is used to assess a company’s profitability relative to its equity.

See our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

How do you calculate return on equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for LEPU ScienTech Medical Technology (Shanghai) is:

7.9% = CN¥152m ÷ CN¥1.9b (based on the trailing twelve months to December 2023).

The ‘return’ is the annual profit. This means that for every HK$1 of equity, the company generated HK$0.08 in profit.

Why is ROE important for earnings growth?

So far we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or ‘retains’ for future growth, which then gives us an idea about the company’s growth potential. 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 have these characteristics.

LEPU ScienTech Medical Technology (Shanghai) earnings growth and 7.9% ROE

At first glance, LEPU ScienTech Medical Technology (Shanghai)’s ROE doesn’t look promising. However, further research shows that the company’s ROE is comparable to the industry average of 8.6%. Still, LEPU ScienTech Medical Technology (Shanghai) has shown fairly decent growth in its net income, which grew by 9.4%. Given the somewhat low ROE, it is likely that there are other aspects driving this growth. For example, it is possible that the company’s management has made good strategic decisions, or that the company has a low payout ratio.

When we then compared LEPU ScienTech Medical Technology (Shanghai)’s net income growth with the industry, we found that the company’s reported growth is comparable to the industry average growth rate of 11% over the past few years.

The basis for assigning value to a company is largely linked to profit growth. The investor should try to determine whether the expected earnings growth or decline, either way, is priced in. This then helps him determine whether the stock has a bright or bleak future. If you’re wondering about LEPU ScienTech Medical Technology (Shanghai)’s valuation, check out this gauge of its price-to-earnings ratio, compared to the industry.

Is LEPU ScienTech Medical Technology (Shanghai) making effective use of retained earnings?

The really high three-year average payout ratio of 130% for LEPU ScienTech Medical Technology (Shanghai) suggests the company is paying its shareholders more than what it earns. However, this has not really hindered its ability to grow, as we saw earlier. Although the high payout ratio is certainly something we would keep an eye on if the company can’t sustain its growth or if things deteriorate.

Resume

Overall, we have mixed feelings about LEPU ScienTech Medical Technology (Shanghai). While the company has posted impressive earnings growth, its poor return on equity and low profit retention make us doubt whether that growth could continue if the company happens to be facing some risk. So far, we’ve only had a brief discussion about the company’s earnings growth. So it might be worth checking this free detailed chart of LEPU ScienTech Medical Technology (Shanghai) past earnings, as well as its revenues and cash flows to gain a deeper insight into the company’s performance.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.