Does Nanjing Medlander Medical Technology Co.,Ltd.'s (SHSE:688273) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Simply Wall St · 09/28 02:04

Most readers would already be aware that Nanjing Medlander Medical TechnologyLtd's (SHSE:688273) stock increased significantly by 17% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Nanjing Medlander Medical TechnologyLtd'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 Nanjing Medlander Medical TechnologyLtd

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 Nanjing Medlander Medical TechnologyLtd is:

7.8% = CN¥108m ÷ CN¥1.4b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Nanjing Medlander Medical TechnologyLtd's Earnings Growth And 7.8% ROE

At first glance, Nanjing Medlander Medical TechnologyLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.3%, we may spare it some thought. Having said that, Nanjing Medlander Medical TechnologyLtd's five year net income decline rate was 2.4%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

That being said, we compared Nanjing Medlander Medical TechnologyLtd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 5.2% in the same 5-year period.

past-earnings-growth
SHSE:688273 Past Earnings Growth September 28th 2024

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Nanjing Medlander Medical TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nanjing Medlander Medical TechnologyLtd Making Efficient Use Of Its Profits?

Nanjing Medlander Medical TechnologyLtd has a high three-year median payout ratio of 81% (that is, it is retaining 19% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 3 risks we have identified for Nanjing Medlander Medical TechnologyLtd.

Only recently, Nanjing Medlander Medical TechnologyLtd stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Conclusion

Overall, we would be extremely cautious before making any decision on Nanjing Medlander Medical TechnologyLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Nanjing Medlander 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.