Shenzhen Mindray Bio-Medical Electronics Co., Ltd.'s (SZSE:300760) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 21% over the past three months, it is easy to disregard Shenzhen Mindray Bio-Medical Electronics (SZSE:300760). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Shenzhen Mindray Bio-Medical Electronics' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shenzhen Mindray Bio-Medical Electronics

How Is ROE Calculated?

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 Shenzhen Mindray Bio-Medical Electronics is:

33% = CN¥12b ÷ CN¥36b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.33 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shenzhen Mindray Bio-Medical Electronics' Earnings Growth And 33% ROE

To begin with, Shenzhen Mindray Bio-Medical Electronics has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 7.2% which is quite remarkable. As a result, Shenzhen Mindray Bio-Medical Electronics' exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Shenzhen Mindray Bio-Medical Electronics' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.5% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. Is 300760 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shenzhen Mindray Bio-Medical Electronics Using Its Retained Earnings Effectively?

Shenzhen Mindray Bio-Medical Electronics has a significant three-year median payout ratio of 53%, meaning the company only retains 47% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Shenzhen Mindray Bio-Medical Electronics is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 59% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 35%.

Summary

Overall, we are quite pleased with Shenzhen Mindray Bio-Medical Electronics' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.