Lepu Medical Technology (Beijing) Co., Ltd. (SZSE:300003) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Lepu Medical Technology (Beijing)’s (SZSE:300003) stock is up by a considerable 31% over the past month. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. Particularly, we will be paying attention to Lepu Medical Technology (Beijing)’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Lepu Medical Technology (Beijing)

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Lepu Medical Technology (Beijing) is:

5.6% = CN¥984m ÷ CN¥17b (Based on the trailing twelve months to June 2024).

The ‘return’ refers to a company’s earnings over the last year. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.06 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. 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.

Lepu Medical Technology (Beijing)’s Earnings Growth And 5.6% ROE

At first glance, Lepu Medical Technology (Beijing)’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 7.3% either. For this reason, Lepu Medical Technology (Beijing)’s five year net income decline of 4.0% 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 instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Lepu Medical Technology (Beijing)’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 5.2% over the last few years.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Lepu Medical Technology (Beijing)’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lepu Medical Technology (Beijing) Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 32% (or a retention ratio of 68%) which is pretty normal, Lepu Medical Technology (Beijing)’s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Lepu Medical Technology (Beijing) has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 20% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 11%, over the same period.

Conclusion

In total, we’re a bit ambivalent about Lepu Medical Technology (Beijing)’s performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.