Guangzhou Kingmed Diagnostics Group's (SHSE:603882) stock is up by a considerable 23% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Guangzhou Kingmed Diagnostics Group's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 Guangzhou Kingmed Diagnostics Group is:

1.9% = CN¥154m ÷ CN¥8.0b (Based on the trailing twelve months to September 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¥0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Guangzhou Kingmed Diagnostics Group's Earnings Growth And 1.9% ROE

As you can see, Guangzhou Kingmed Diagnostics Group's ROE looks pretty weak. Even compared to the average industry ROE of 6.7%, the company's ROE is quite dismal. As a result, Guangzhou Kingmed Diagnostics Group's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Guangzhou Kingmed Diagnostics Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 2.0% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guangzhou Kingmed Diagnostics Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangzhou Kingmed Diagnostics Group Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 40% (or a retention ratio of 60%), Guangzhou Kingmed Diagnostics Group hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Guangzhou Kingmed Diagnostics Group has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. However, Guangzhou Kingmed Diagnostics Group's ROE is predicted to rise to 8.7% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that the performance shown by Guangzhou Kingmed Diagnostics Group can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.