Shanghai Rongtai Health Technology Corporation Limited's (SHSE:603579) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Simply Wall St · 10/16 06:46

Shanghai Rongtai Health Technology (SHSE:603579) has had a great run on the share market with its stock up by a significant 18% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Shanghai Rongtai Health Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shanghai Rongtai Health Technology

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 Shanghai Rongtai Health Technology is:

11% = CN¥209m ÷ CN¥2.0b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Shanghai Rongtai Health Technology's Earnings Growth And 11% ROE

When you first look at it, Shanghai Rongtai Health Technology's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.8%, is definitely interesting. However, Shanghai Rongtai Health Technology's five year net income decline rate was 8.1%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.

However, when we compared Shanghai Rongtai Health Technology's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.3% in the same period. This is quite worrisome.

past-earnings-growth
SHSE:603579 Past Earnings Growth October 16th 2024

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Shanghai Rongtai Health Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Rongtai Health Technology Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 41% (that is, a retention ratio of 59%), the fact that Shanghai Rongtai Health Technology's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Shanghai Rongtai Health Technology has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

Overall, we feel that Shanghai Rongtai Health Technology certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.