LEPU ScienTech Medical Technology (Shanghai) Co., Ltd.'s (HKG:2291) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

LEPU ScienTech Medical Technology (Shanghai)'s (HKG:2291) stock is up by 9.7% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Specifically, we decided to study LEPU ScienTech Medical Technology (Shanghai)'s ROE in this article.

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.

Check out our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

How To Calculate Return On Equity?

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 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?

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.

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. However, given that the company's ROE is similar to the average industry ROE of 8.4%, we may spare it some thought. Having said that, LEPU ScienTech Medical Technology (Shanghai) has shown a modest net income growth of 9.4% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that LEPU ScienTech Medical Technology (Shanghai)'s reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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. Still the company's earnings have grown respectably. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates. You can see the 2 risks we have identified for LEPU ScienTech Medical Technology (Shanghai) by visiting our risks dashboard for free on our platform here.

Summary

Overall, we would be extremely cautious before making any decision on LEPU ScienTech Medical Technology (Shanghai). Although the company has shown a fair bit of growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on LEPU ScienTech Medical Technology (Shanghai) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.