Cofoe Medical Technology Co.,Ltd.’s (SZSE:301087) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Cofoe Medical TechnologyLtd’s (SZSE:301087) stock is up by a considerable 28% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don’t look very promising. Specifically, we decided to study Cofoe Medical TechnologyLtd’s ROE in this article.

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.

Check out our latest analysis for Cofoe Medical TechnologyLtd

How Do You 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 Cofoe Medical TechnologyLtd is:

5.5% = CN¥262m ÷ CN¥4.7b (Based on the trailing twelve months to September 2024).

The ‘return’ is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.06 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. 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. 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.

Cofoe Medical TechnologyLtd’s Earnings Growth And 5.5% ROE

When you first look at it, Cofoe Medical TechnologyLtd’s ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 7.1% either. Therefore, it might not be wrong to say that the five year net income decline of 4.0% seen by Cofoe Medical TechnologyLtd was probably the result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. Such as – low earnings retention or poor allocation of capital.

So, as a next step, we compared Cofoe Medical TechnologyLtd’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 6.1% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Cofoe Medical TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cofoe Medical TechnologyLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 76% (implying that 24% of the profits are retained), most of Cofoe Medical TechnologyLtd’s profits are being paid to shareholders, which explains the company’s shrinking earnings. The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. You can see the 2 risks we have identified for Cofoe Medical TechnologyLtd by visiting our risks dashboard for free on our platform here.

Moreover, Cofoe Medical TechnologyLtd has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Cofoe Medical TechnologyLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we’ve only made a short study of the company’s growth data. You can do your own research on Cofoe Medical TechnologyLtd 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.