It is hard to get excited after looking at Kangji Medical Holdings' (HKG:9997) recent performance, when its stock has declined 9.7% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Kangji Medical Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Kangji Medical Holdings is:

21% = CN¥499m ÷ CN¥2.4b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.21.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Kangji Medical Holdings' Earnings Growth And 21% ROE

To begin with, Kangji Medical Holdings seems to have a respectable ROE. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. This certainly adds some context to Kangji Medical Holdings' exceptional 22% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Kangji Medical Holdings' 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 12% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Kangji Medical Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kangji Medical Holdings Making Efficient Use Of Its Profits?

Kangji Medical Holdings' three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Kangji Medical Holdings is reinvesting its earnings efficiently.

Besides, Kangji Medical Holdings has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Kangji Medical Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. 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.