Is the recent stock performance of China Medical System Holdings Limited(HKG:867) related to its strong fundamentals?

China Medical System Holdings (HKG:867) has had a strong run in the stock market, with its stock rising 11% over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we will pay attention to the ROE of China Medical System Holdings today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for China Medical System Holdings

How do you calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for China Medical System Holdings is:

23% = CN¥2.9b ÷ CN¥12b (Based on trailing twelve months to June 2021).

The “return” is the annual profit. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.23.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of China Medical System Holdings’ earnings growth and 23% ROE

First of all, we appreciate the fact that China Medical System Holdings has an impressive ROE. Second, even when compared to the industry average of 11%, the company’s ROE is quite impressive. Probably because of this, China Medical System Holdings has been able to see a decent growth in net income of 15% over the past five years.

We then compared the net income growth of China Medical System Holdings with the industry and we are glad to see that the growth figure of the company is higher compared to the industry which has a growth rate of 11 % over the same period.

SEHK: 867 Past Earnings Growth Jan 16, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of China Medical System Holdings, check out this indicator of its price/earnings ratio, relative to its sector.

Does China Medical System Holdings effectively reinvest its profits?

China Medical System Holdings has a three-year median payout ratio of 40%, implying that it keeps the remaining 60% of its profits. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.

Also, China Medical System Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 39%. As a result, China Medical System Holdings’ ROE is not expected to change much either, which we infer from analysts’ estimate of 24% for future ROE.

Summary

Overall, we are quite satisfied with the performance of China Medical System Holdings. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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