Is Perfect Shape Medical Limited's (HKG:1830) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Perfect Shape Medical's (HKG:1830) stock increased significantly by 11% over the past three months. 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. In this article, we decided to focus on Perfect Shape Medical's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Perfect Shape Medical

How Do You Calculate Return On Equity?

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 Perfect Shape Medical is:

30% = HK$253m ÷ HK$838m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.30.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Perfect Shape Medical's Earnings Growth And 30% ROE

To begin with, Perfect Shape Medical has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Under the circumstances, Perfect Shape Medical's considerable five year net income growth of 27% was to be expected.

We then compared Perfect Shape Medical's 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 19% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Shape Medical is trading on a high P/E or a low P/E, relative to its industry.

Is Perfect Shape Medical Making Efficient Use Of Its Profits?

Perfect Shape Medical's significant three-year median payout ratio of 99% (where it is retaining only 1.4% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

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

Conclusion

In total, it does look like Perfect Shape Medical has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Perfect Shape Medical's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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