Nanjing Vishee Medical Technology Co., Ltd's (SHSE:688580) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Nanjing Vishee Medical Technology's (SHSE:688580) stock is up by a considerable 50% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Nanjing Vishee Medical Technology's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To 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 Nanjing Vishee Medical Technology is:

6.2% = CN¥100m ÷ CN¥1.6b (Based on the trailing twelve months to December 2024).

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¥0.06 in profit.

See our latest analysis for Nanjing Vishee Medical Technology

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 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.

A Side By Side comparison of Nanjing Vishee Medical Technology's Earnings Growth And 6.2% ROE

When you first look at it, Nanjing Vishee Medical Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.1%, so we won't completely dismiss the company. Still, Nanjing Vishee Medical Technology has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 2.5% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Nanjing Vishee Medical Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nanjing Vishee Medical Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 57% (implying that the company keeps only 43% of its income) of its business to reinvest into its business), most of Nanjing Vishee Medical Technology's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Nanjing Vishee Medical Technology has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Nanjing Vishee Medical Technology. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.