Xiangyu Medical Co.,Ltd's (SHSE:688626) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 26% over the past three months, it is easy to disregard Xiangyu MedicalLtd (SHSE:688626). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Xiangyu MedicalLtd'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.

See our latest analysis for Xiangyu MedicalLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Xiangyu MedicalLtd is:

11% = CN¥228m ÷ CN¥2.1b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 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 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.

Xiangyu MedicalLtd's Earnings Growth And 11% ROE

To begin with, Xiangyu MedicalLtd seems to have a respectable ROE. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. However, for some reason, the higher returns aren't reflected in Xiangyu MedicalLtd's meagre five year net income growth average of 4.4%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Xiangyu MedicalLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Xiangyu MedicalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Xiangyu MedicalLtd Efficiently Re-investing Its Profits?

While Xiangyu MedicalLtd has a decent three-year median payout ratio of 28% (or a retention ratio of 72%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Xiangyu MedicalLtd has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we do feel that Xiangyu MedicalLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.