Is LEPU ScienTech Medical Technology (Shanghai) Co., Ltd.'s (HKG:2291) Stock Price Struggling As A Result Of Its Mixed Financials?

LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) has had a rough three months with its share price down 14%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on LEPU ScienTech Medical Technology (Shanghai)'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.

View our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

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 LEPU ScienTech Medical Technology (Shanghai) is:

7.9% = CN¥152m ÷ CN¥1.9b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.08 in profit.

Why Is ROE Important For 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.

LEPU ScienTech Medical Technology (Shanghai)'s Earnings Growth And 7.9% ROE

At first glance, LEPU ScienTech Medical Technology (Shanghai)'s ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.6%. Even so, LEPU ScienTech Medical Technology (Shanghai) has shown a fairly decent growth in its net income which grew at a rate of 9.4%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing LEPU ScienTech Medical Technology (Shanghai)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 LEPU ScienTech Medical Technology (Shanghai)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is LEPU ScienTech Medical Technology (Shanghai) Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 130% for LEPU ScienTech Medical Technology (Shanghai) suggests that the company is paying its shareholders more than what it is earning. However, this hasn't really hampered its ability to grow as we saw earlier. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates.

Summary

Overall, we have mixed feelings about LEPU ScienTech Medical Technology (Shanghai). While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of LEPU ScienTech Medical Technology (Shanghai)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.