Could The Market Be Wrong About Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Shandong Weigao Group Medical Polymer's (HKG:1066) recent performance, when its stock has declined 33% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Shandong Weigao Group Medical Polymer's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shandong Weigao Group Medical Polymer

How Do You 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 Shandong Weigao Group Medical Polymer is:

10% = CN¥2.5b ÷ CN¥24b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax 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$0.10 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shandong Weigao Group Medical Polymer's Earnings Growth And 10% ROE

To start with, Shandong Weigao Group Medical Polymer's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.9%. This probably goes some way in explaining Shandong Weigao Group Medical Polymer's moderate 13% growth over the past five years amongst other factors.

As a next step, we compared Shandong Weigao Group Medical Polymer's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 13% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Shandong Weigao Group Medical Polymer's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shandong Weigao Group Medical Polymer Making Efficient Use Of Its Profits?

Shandong Weigao Group Medical Polymer has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Shandong Weigao Group Medical Polymer has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.

Summary

In total, we are pretty happy with Shandong Weigao Group Medical Polymer's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.