Is Guanze Medical Information Industry (Holding) Co., Ltd.'s (HKG:2427) Recent Performance Underpinned By Weak Financials?

It is hard to get excited after looking at Guanze Medical Information Industry (Holding)'s (HKG:2427) recent performance, when its stock has declined 36% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Guanze Medical Information Industry (Holding)'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Guanze Medical Information Industry (Holding)

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 Guanze Medical Information Industry (Holding) is:

4.8% = CN¥12m ÷ CN¥242m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Guanze Medical Information Industry (Holding)'s Earnings Growth And 4.8% ROE

When you first look at it, Guanze Medical Information Industry (Holding)'s ROE doesn't look that attractive. Next, when compared to the average industry ROE of 7.2%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Guanze Medical Information Industry (Holding)'s five year net income decline of 8.2% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

However, when we compared Guanze Medical Information Industry (Holding)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 12% in the same period. This is quite worrisome.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guanze Medical Information Industry (Holding) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guanze Medical Information Industry (Holding) Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 83% (implying that 17% of the profits are retained), most of Guanze Medical Information Industry (Holding)'s profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for Guanze Medical Information Industry (Holding) by visiting our risks dashboard for free on our platform here.

Only recently, Guanze Medical Information Industry (Holding) stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Summary

On the whole, Guanze Medical Information Industry (Holding)'s performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Guanze Medical Information Industry (Holding)'s past profit growth, check out this visualization 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.