Can Mixed Fundamentals Have A Negative Impact on China Isotope & Radiation Corporation (HKG:1763) Current Share Price Momentum?

China Isotope & Radiation (HKG:1763) has had a great run on the share market with its stock up by a significant 13% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on China Isotope & Radiation's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for China Isotope & Radiation

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 China Isotope & Radiation is:

8.6% = CN¥476m ÷ CN¥5.5b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.09 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

China Isotope & Radiation's Earnings Growth And 8.6% ROE

At first glance, China Isotope & Radiation's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.8%. However, China Isotope & Radiation has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

We then compared China Isotope & Radiation's net income growth with the industry and found that the average industry growth rate was 15% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about China Isotope & Radiation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Isotope & Radiation Using Its Retained Earnings Effectively?

China Isotope & Radiation's low three-year median payout ratio of 15%, (meaning the company retains85% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, China Isotope & Radiation has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 8.9% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 14%, over the same period.

Conclusion

Overall, we have mixed feelings about China Isotope & Radiation. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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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