Home Medical stocks Is China Medical System Holdings Limited’s (HKG:867) Latest Stock Performance Being Led...

Is China Medical System Holdings Limited’s (HKG:867) Latest Stock Performance Being Led By Its Strong Fundamentals?

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China Medical System Holdings’ (HKG:867) stock is up by 4.2% over the past month. Given its impressive performance, we decided to study the company’s key financial indicators as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to China Medical System Holdings’ ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for China Medical System Holdings

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 China Medical System Holdings is:

20% = CN¥2.1b ÷ CN¥10b (Based on the trailing twelve months to June 2020).

The ‘return’ refers to a company’s earnings over the last year. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$0.20 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

China Medical System Holdings’ Earnings Growth And 20% ROE

To begin with, China Medical System Holdings seems to have a respectable ROE. Especially when compared to the industry average of 11% the company’s ROE looks pretty impressive. This certainly adds some context to China Medical System Holdings’ decent 15% net income growth seen over the past five years.

We then performed a comparison between China Medical System Holdings’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 15% in the same period.

past-earnings-growth

SEHK:867 Past Earnings Growth December 30th 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 China Medical System Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is China Medical System Holdings Efficiently Re-investing Its Profits?

China Medical System Holdings has a healthy combination of a moderate three-year median payout ratio of 40% (or a retention ratio of 60%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, China Medical System Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 35%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Summary

On the whole, we feel that China Medical System Holdings’ performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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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