Is Mediwelcome Healthcare Management & Technology Inc.'s (HKG:2159) Recent Price Movement Underpinned By Its Weak Fundamentals?

Mediwelcome Healthcare Management & Technology (HKG:2159) has had a rough three months with its share price down 27%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Mediwelcome Healthcare Management & Technology'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Mediwelcome Healthcare Management & Technology

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Mediwelcome Healthcare Management & Technology is:

3.4% = CN¥9.7m ÷ CN¥288m (Based on the trailing twelve months to June 2021).

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$0.03.

What Is The Relationship Between ROE And 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. 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.

Mediwelcome Healthcare Management & Technology's Earnings Growth And 3.4% ROE

As you can see, Mediwelcome Healthcare Management & Technology's ROE looks pretty weak. Even when compared to the industry average of 7.5%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 32% seen by Mediwelcome Healthcare Management & Technology was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Mediwelcome Healthcare Management & Technology's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 3.5% 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Mediwelcome Healthcare Management & Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mediwelcome Healthcare Management & Technology Efficiently Re-investing Its Profits?

Summary

On the whole, we feel that the performance shown by Mediwelcome Healthcare Management & Technology can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 4 risks we have identified for Mediwelcome Healthcare Management & Technology.

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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.
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