Perfect Medical Health Management Limited's (HKG:1830) Stock Is Going Strong: Have Financials A Role To Play?

By
Simply Wall St
Published
November 25, 2021
SEHK:1830
Source: Shutterstock

Perfect Medical Health Management's (HKG:1830) stock is up by a considerable 9.9% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Perfect Medical Health Management's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Perfect Medical Health Management

How To Calculate Return On Equity?

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 Perfect Medical Health Management is:

42% = HK$285m ÷ HK$685m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.42 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Perfect Medical Health Management's Earnings Growth And 42% ROE

First thing first, we like that Perfect Medical Health Management has an impressive ROE. Secondly, even when compared to the industry average of 9.7% the company's ROE is quite impressive. Under the circumstances, Perfect Medical Health Management's considerable five year net income growth of 24% was to be expected.

Next, on comparing with the industry net income growth, we found that Perfect Medical Health Management's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
SEHK:1830 Past Earnings Growth November 25th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Perfect Medical Health Management is trading on a high P/E or a low P/E, relative to its industry.

Is Perfect Medical Health Management Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 99% (implying that it keeps only 1.4% of profits) for Perfect Medical Health Management suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Perfect Medical Health Management has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like Perfect Medical Health Management has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Perfect Medical Health Management's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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