Guangzhou Kingmed Diagnostics Group Co., Ltd.'s (SHSE:603882) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Guangzhou Kingmed Diagnostics Group (SHSE:603882) has had a great run on the share market with its stock up by a significant 21% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Guangzhou Kingmed Diagnostics Group's ROE today.

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.

See our latest analysis for Guangzhou Kingmed Diagnostics Group

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Guangzhou Kingmed Diagnostics Group is:

1.9% = CN¥154m ÷ CN¥8.0b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Guangzhou Kingmed Diagnostics Group's Earnings Growth And 1.9% ROE

It is hard to argue that Guangzhou Kingmed Diagnostics Group's ROE is much good in and of itself. Even when compared to the industry average of 6.7%, the ROE figure is pretty disappointing. Therefore, Guangzhou Kingmed Diagnostics Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Guangzhou Kingmed Diagnostics Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 2.0% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Guangzhou Kingmed Diagnostics Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangzhou Kingmed Diagnostics Group Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 40% (implying that the company keeps 60% of its income) over the last three years, Guangzhou Kingmed Diagnostics Group has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Guangzhou Kingmed Diagnostics Group has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. Regardless, the future ROE for Guangzhou Kingmed Diagnostics Group is predicted to rise to 8.7% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we have mixed feelings about Guangzhou Kingmed Diagnostics Group. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.