OrbusNeich Medical Group Holdings Limited's (HKG:6929) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that OrbusNeich Medical Group Holdings' (HKG:6929) stock increased significantly by 13% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on OrbusNeich Medical Group Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for OrbusNeich Medical Group Holdings

How Is ROE Calculated?

Return on equity 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 OrbusNeich Medical Group Holdings is:

10% = US$39m ÷ US$374m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

OrbusNeich Medical Group Holdings' Earnings Growth And 10% ROE

To begin with, OrbusNeich Medical Group Holdings seems to have a respectable ROE. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. This certainly adds some context to OrbusNeich Medical Group Holdings' exceptional 52% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that OrbusNeich Medical Group Holdings' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about OrbusNeich Medical Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is OrbusNeich Medical Group Holdings Using Its Retained Earnings Effectively?

OrbusNeich Medical Group Holdings' three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. By the looks of it, the dividend is well covered and OrbusNeich Medical Group Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While OrbusNeich Medical Group Holdings has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. However, OrbusNeich Medical Group Holdings' future ROE is expected to decline to 8.1% despite there being not much change anticipated in the company's payout ratio.

Summary

In total, we are pretty happy with OrbusNeich Medical Group Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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.