Most readers would already be aware that C.I. MedicalLtd's (TYO:3540) stock increased significantly by 34% over the past month. 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 C.I. MedicalLtd's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
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 C.I. MedicalLtd is:
21% = JP¥2.9b ÷ JP¥14b (Based on the trailing twelve months to December 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.21 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
C.I. MedicalLtd's Earnings Growth And 21% ROE
Firstly, we acknowledge that C.I. MedicalLtd has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. This likely paved the way for the modest 13% net income growth seen by C.I. MedicalLtd over the past five years. growth
Next, on comparing C.I. MedicalLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if C.I. MedicalLtd is trading on a high P/E or a low P/E, relative to its industry.
Is C.I. MedicalLtd Making Efficient Use Of Its Profits?
C.I. MedicalLtd's three-year median payout ratio to shareholders is 9.9% (implying that it retains 90% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Moreover, C.I. MedicalLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.
In total, we are pretty happy with C.I. MedicalLtd's 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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This article by Simply Wall St is general in nature. 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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