It is hard to get excited after looking at Shanghai MicroPort Endovascular MedTech's (SHSE:688016) recent performance, when its stock has declined 12% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Shanghai MicroPort Endovascular MedTech's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shanghai MicroPort Endovascular MedTech is:

13% = CN¥547m ÷ CN¥4.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.13 in profit.

What Has ROE Got To Do With 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.

Shanghai MicroPort Endovascular MedTech's Earnings Growth And 13% ROE

To begin with, Shanghai MicroPort Endovascular MedTech seems to have a respectable ROE. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. This certainly adds some context to Shanghai MicroPort Endovascular MedTech's exceptional 28% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

We then compared Shanghai MicroPort Endovascular MedTech's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.5% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shanghai MicroPort Endovascular MedTech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai MicroPort Endovascular MedTech Efficiently Re-investing Its Profits?

Shanghai MicroPort Endovascular MedTech's three-year median payout ratio is a pretty moderate 41%, meaning the company retains 59% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shanghai MicroPort Endovascular MedTech is reinvesting its earnings efficiently.

Besides, Shanghai MicroPort Endovascular MedTech has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its 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 46%. However, Shanghai MicroPort Endovascular MedTech's ROE is predicted to rise to 18% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Shanghai MicroPort Endovascular MedTech's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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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.