Does The Market Have A Low Tolerance For Lepu Medical Technology (Beijing) Co., Ltd.'s (SZSE:300003) Mixed Fundamentals?

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 three months. 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. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Lepu Medical Technology (Beijing)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Lepu Medical Technology (Beijing) is:

3.9% = CN¥672m ÷ CN¥17b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. 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 3.9% ROE

It is hard to argue that Lepu Medical Technology (Beijing)'s ROE is much good in and of itself. Even when compared to the industry average of 7.1%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 7.8% seen by Lepu Medical Technology (Beijing) over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Lepu Medical Technology (Beijing)'s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.1% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Lepu Medical Technology (Beijing)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

Looking at its three-year median payout ratio of 33% (or a retention ratio of 67%) which is pretty normal, Lepu Medical Technology (Beijing)'s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. 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.

Conclusion

In total, we're a bit ambivalent about Lepu Medical Technology (Beijing)'s performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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.