Is Chengdu Bright Eye Hospital Group Co., Ltd.'s (SZSE:301239) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Simply Wall St · 10/18 02:28

Most readers would already be aware that Chengdu Bright Eye Hospital Group's (SZSE:301239) stock increased significantly by 31% over the past 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. In this article, we decided to focus on Chengdu Bright Eye Hospital Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Chengdu Bright Eye Hospital Group

How Do You Calculate Return On Equity?

Return on equity 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 Chengdu Bright Eye Hospital Group is:

3.7% = CN¥85m ÷ CN¥2.3b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Chengdu Bright Eye Hospital Group's Earnings Growth And 3.7% ROE

It is hard to argue that Chengdu Bright Eye Hospital Group's ROE is much good in and of itself. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Chengdu Bright Eye Hospital Group grew its net income at a significant rate of 22% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Chengdu Bright Eye Hospital Group's growth is quite high when compared to the industry average growth of 4.3% in the same period, which is great to see.

past-earnings-growth
SZSE:301239 Past Earnings Growth October 18th 2024

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. 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 Chengdu Bright Eye Hospital Group is trading on a high P/E or a low P/E, relative to its industry.

Is Chengdu Bright Eye Hospital Group Using Its Retained Earnings Effectively?

Chengdu Bright Eye Hospital Group's ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. So it looks like Chengdu Bright Eye Hospital Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Chengdu Bright Eye Hospital Group has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we feel that Chengdu Bright Eye Hospital Group certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.