Can Mixed Fundamentals Have A Negative Impact on Beijing Chunlizhengda Medical Instruments Co., Ltd. (HKG:1858) Current Share Price Momentum?

Most readers would already be aware that Beijing Chunlizhengda Medical Instruments' (HKG:1858) stock increased significantly by 19% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Beijing Chunlizhengda Medical Instruments' 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.

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How To 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 Beijing Chunlizhengda Medical Instruments is:

5.5% = CN¥160m ÷ CN¥2.9b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.06 in profit.

See our latest analysis for Beijing Chunlizhengda Medical Instruments

What Has ROE Got To Do With 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.

Beijing Chunlizhengda Medical Instruments' Earnings Growth And 5.5% ROE

On the face of it, Beijing Chunlizhengda Medical Instruments' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.0% either. Therefore, it might not be wrong to say that the five year net income decline of 11% seen by Beijing Chunlizhengda Medical Instruments was probably the result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Beijing Chunlizhengda Medical Instruments' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 15% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is 1858 worth today? The intrinsic value infographic in our free research report helps visualize whether 1858 is currently mispriced by the market.

Is Beijing Chunlizhengda Medical Instruments Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 41% (or a retention ratio of 59%) which is pretty normal, Beijing Chunlizhengda Medical Instruments' declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Beijing Chunlizhengda Medical Instruments has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

On the whole, we feel that the performance shown by Beijing Chunlizhengda Medical Instruments can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.