With its stock down 4.6% over the past three months, it is easy to disregard Medical Imaging (GTSM:6637). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Medical Imaging'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.
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Medical Imaging is:
26% = NT$90m ÷ NT$350m (Based on the trailing twelve months to June 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.26 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 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.
A Side By Side comparison of Medical Imaging's Earnings Growth And 26% ROE
First thing first, we like that Medical Imaging has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.1% also doesn't go unnoticed by us. So, the substantial 21% net income growth seen by Medical Imaging over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Medical Imaging's growth is quite high when compared to the industry average growth of 9.7% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Medical Imaging is trading on a high P/E or a low P/E, relative to its industry.
Is Medical Imaging Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 54% (implying that it keeps only 46% of profits) for Medical Imaging suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, Medical Imaging has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.
In total, we are pretty happy with Medical Imaging's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. You can do your own research on Medical Imaging 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. 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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