Shinva Medical Instrument Co.,Ltd.'s (SHSE:600587) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Simply Wall St · 10/16 05:58

Most readers would already be aware that Shinva Medical InstrumentLtd's (SHSE:600587) stock increased significantly by 17% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Shinva Medical InstrumentLtd's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Shinva Medical InstrumentLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shinva Medical InstrumentLtd is:

8.8% = CN¥697m ÷ CN¥7.9b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shinva Medical InstrumentLtd's Earnings Growth And 8.8% ROE

On the face of it, Shinva Medical InstrumentLtd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 7.3%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 6.1% seen over the past five years by Shinva Medical InstrumentLtd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then performed a comparison between Shinva Medical InstrumentLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.2% in the same 5-year period.

past-earnings-growth
SHSE:600587 Past Earnings Growth October 16th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 600587? You can find out in our latest intrinsic value infographic research report.

Is Shinva Medical InstrumentLtd Efficiently Re-investing Its Profits?

Shinva Medical InstrumentLtd has a low three-year median payout ratio of 11%, meaning that the company retains the remaining 89% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Shinva Medical InstrumentLtd 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 5.7% over the next three years. As a result, the expected drop in Shinva Medical InstrumentLtd's payout ratio explains the anticipated rise in the company's future ROE to 11%, over the same period.

Conclusion

On the whole, we feel that Shinva Medical InstrumentLtd's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.