Medlive Technology (HKG:2192) has had a tough three months, with its shares down 32%. However, stock prices are often driven by the company’s long-term financial health, which in this case looks pretty solid. In this article, we decided to focus on Medlive Technology’s ROE.
Return on Equity, or ROE, is a key metric used to assess how effectively a company’s management is using the company’s capital. Simply put, it is used to assess a company’s profitability relative to its equity capital.
Check out our latest analysis for Medlive Technology
How to calculate return on equity?
ROE can be calculated using the following formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Therefore, according to the above formula, the return on equity of Meilai Technology is:
1.3% = CNY 53m ÷ CNY 4.2b (based on trailing 12 months to June 2022).
The “return” is the annual profit. Another way to think about it is that for every HK$1 of equity, the company is able to earn HK$0.01 in profit.
What is the relationship between ROE and earnings growth?
We have established that ROE is an effective profit-generating metric for measuring a company’s future earnings. We now need to assess how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. All else being equal, firms with higher returns on equity and higher profit retention typically have higher growth rates than firms that do not share the same characteristics.
Side by side comparison of Medlive Technology’s earnings growth and 1.3% return on equity
It can be seen that the return on net assets of Meilai Technology is low. Even compared to the industry average of 11%, the ROE number is quite disappointing. Medlive Technology has still been able to deliver a respectable 17% net revenue growth over the past five years. In our view, there may be other aspects that positively impact the company’s earnings growth. For example – high yield retention or effective management in place.
Secondly, comparing the net profit growth rate of Meilai Technology with the industry, we find that the growth rate reported by the company is similar to the industry average growth rate of 17% in the same period.
To a large extent, the basis of a company’s value is tied to its earnings growth. The next thing investors need to determine is whether the expected earnings growth has been priced into the share price. By doing this, they will know whether the stock is waiting in clear blue water or swampy waters. If you want to understand Medlive Technology’s valuation, take a look at the P/E ratio metric compared to its industry.
Is Medlive Technology Using Its Profits Effectively?
With a median three-year payout ratio of 25% (meaning the company retains 75% of profits), Medlive Technology appears to be reinvesting in an efficient manner, seeing solid earnings growth and paying a good dividend cover.
While Medlive Technology’s earnings have grown, it hasn’t started paying a dividend until recently. The company may well decide to impress new and existing shareholders with a dividend.
Overall, we do feel that Meilai Technology has some positive attributes. Despite the low returns, the fact that the company reinvests a significant portion of its profits back into the business certainly contributed to its high earnings growth. Having said that, looking at current analyst estimates, we see the company’s earnings poised to gain momentum. To learn more about the latest analyst forecasts for companies, check out the Analyst Forecasts for Companies visualization.
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.