With its stock down 24% over the past three months, it is easy to disregard Shenzhen Mindray Bio-Medical Electronics (SZSE:300760). 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 Shenzhen Mindray Bio-Medical Electronics' ROE in this article.

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. 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 Shenzhen Mindray Bio-Medical Electronics is:

30% = CN¥12b ÷ CN¥42b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.30 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Shenzhen Mindray Bio-Medical Electronics' Earnings Growth And 30% ROE

To begin with, Shenzhen Mindray Bio-Medical Electronics has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.1% also doesn't go unnoticed by us. Probably as a result of this, Shenzhen Mindray Bio-Medical Electronics was able to see a decent net income growth of 19% over the last five years.

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 6.1%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Shenzhen Mindray Bio-Medical Electronics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Shenzhen Mindray Bio-Medical Electronics has paid dividends over a period of six 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 62%. Accordingly, forecasts suggest that Shenzhen Mindray Bio-Medical Electronics' future ROE will be 33% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Shenzhen Mindray Bio-Medical Electronics' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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.