Are Lepu Medical Technology (Beijing) Co., Ltd.'s (SZSE:300003) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

It is hard to get excited after looking at Lepu Medical Technology (Beijing)'s (SZSE:300003) recent performance, when its stock has declined 15% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Lepu Medical Technology (Beijing)'s ROE today.

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.

Check out our latest analysis for Lepu Medical Technology (Beijing)

How Is ROE Calculated?

Return on equity 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 Lepu Medical Technology (Beijing) is:

6.5% = CN¥1.2b ÷ CN¥18b (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¥0.06 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Lepu Medical Technology (Beijing)'s Earnings Growth And 6.5% ROE

On the face of it, Lepu Medical Technology (Beijing)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. Still, Lepu Medical Technology (Beijing) has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Lepu Medical Technology (Beijing)'s net income growth with the industry and discovered that the industry saw an average growth of 7.0% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Lepu Medical Technology (Beijing) is trading on a high P/E or a low P/E, relative to its industry.

Is Lepu Medical Technology (Beijing) Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 31% (implying that the company keeps 69% of its income) over the last three years, Lepu Medical Technology (Beijing) has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Lepu Medical Technology (Beijing) has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. Still, forecasts suggest that Lepu Medical Technology (Beijing)'s future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we're a bit ambivalent about Lepu Medical Technology (Beijing)'s performance. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.

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