Can Mixed Fundamentals Have A Negative Impact on Wenzhou Kangning Hospital Co., Ltd. (HKG:2120) Current Share Price Momentum?

Wenzhou Kangning Hospital (HKG:2120) has had a great run on the share market with its stock up by a significant 68% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Wenzhou Kangning Hospital's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Wenzhou Kangning Hospital

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 Wenzhou Kangning Hospital is:

1.6% = CN¥22m ÷ CN¥1.3b (Based on the trailing twelve months to June 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$0.02.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Wenzhou Kangning Hospital's Earnings Growth And 1.6% ROE

It is quite clear that Wenzhou Kangning Hospital's ROE is rather low. Even compared to the average industry ROE of 7.2%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Wenzhou Kangning Hospital's very little net income growth of 2.7% over the past five years.

As a next step, we compared Wenzhou Kangning Hospital's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.0% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Wenzhou Kangning Hospital fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wenzhou Kangning Hospital Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, we're a bit ambivalent about Wenzhou Kangning Hospital's performance. 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 the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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