Will Weakness in Shanghai MicroPort Endovascular MedTech Co., Ltd.'s (SHSE:688016) Stock Prove Temporary Given Strong Fundamentals?

Shanghai MicroPort Endovascular MedTech (SHSE:688016) has had a rough three months with its share price down 19%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Shanghai MicroPort Endovascular MedTech's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shanghai MicroPort Endovascular MedTech

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 Shanghai MicroPort Endovascular MedTech is:

13% = CN¥547m ÷ CN¥4.1b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Shanghai MicroPort Endovascular MedTech's Earnings Growth And 13% ROE

To start with, Shanghai MicroPort Endovascular MedTech's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.4%. This certainly adds some context to Shanghai MicroPort Endovascular MedTech's exceptional 28% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Shanghai MicroPort Endovascular MedTech's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.0%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 688016 worth today? The intrinsic value infographic in our free research report helps visualize whether 688016 is currently mispriced by the market.

Is Shanghai MicroPort Endovascular MedTech Efficiently Re-investing Its Profits?

Shanghai MicroPort Endovascular MedTech's three-year median payout ratio is a pretty moderate 41%, meaning the company retains 59% of its income. By the looks of it, the dividend is well covered and Shanghai MicroPort Endovascular MedTech is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Shanghai MicroPort Endovascular MedTech has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 45%. Still, forecasts suggest that Shanghai MicroPort Endovascular MedTech's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Shanghai MicroPort Endovascular MedTech's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com