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Has Vincent Medical Holdings Limited’s (HKG:1612) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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Vincent Medical Holdings’ (HKG:1612) stock is up by a considerable 50% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Vincent Medical Holdings’ ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Vincent Medical Holdings

How To Calculate Return On Equity?

The formula for ROE is:

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

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

21% = HK$107m ÷ HK$508m (Based on the trailing twelve months to June 2020).

The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders’ capital it has, the company made HK$0.21 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Vincent Medical Holdings’ Earnings Growth And 21% ROE

At first glance, Vincent Medical Holdings seems to have a decent ROE. Especially when compared to the industry average of 9.6% the company’s ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Vincent Medical Holdings in the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Vincent Medical Holdings’ net income growth with the industry and discovered that the industry saw an average growth of 13% in the same period.

past-earnings-growth

SEHK:1612 Past Earnings Growth December 27th 2020

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Vincent Medical Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Vincent Medical Holdings Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 43% (meaning the company retains57% of profits) in the last three-year period, Vincent Medical Holdings’ earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Vincent Medical Holdings has paid dividends over a period of four years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 29% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change by much.

Conclusion

Overall, we feel that Vincent Medical Holdings certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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. 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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