It is hard to get excited after looking at Shenzhen Mindray Bio-Medical Electronics' (SZSE:300760) recent performance, when its stock has declined 2.8% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Shenzhen Mindray Bio-Medical Electronics' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Shenzhen Mindray Bio-Medical Electronics is:

33% = CN¥12b ÷ CN¥36b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.33.

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. 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.

Shenzhen Mindray Bio-Medical Electronics' Earnings Growth And 33% ROE

Firstly, we acknowledge that Shenzhen Mindray Bio-Medical Electronics has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.4% which is quite remarkable. Under the circumstances, Shenzhen Mindray Bio-Medical Electronics' considerable five year net income growth of 21% was to be expected.

As a next step, we compared Shenzhen Mindray Bio-Medical Electronics' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.5%.

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. What is 300760 worth today? The intrinsic value infographic in our free research report helps visualize whether 300760 is currently mispriced by the market.

Is Shenzhen Mindray Bio-Medical Electronics Making Efficient Use Of Its Profits?

Shenzhen Mindray Bio-Medical Electronics' significant three-year median payout ratio of 53% (where it is retaining only 47% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Shenzhen Mindray Bio-Medical Electronics has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 59%. Accordingly, forecasts suggest that Shenzhen Mindray Bio-Medical Electronics' future ROE will be 35% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Shenzhen Mindray Bio-Medical Electronics' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.