Is the recent stock performance of Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) related to its strong fundamentals?

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Most readers will already know that shares of Shandong Weigao Group Medical Polymer (HKG:1066) have risen a significant 18% over the past three months. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In this article, we decided to focus on the ROE of Shandong Weigao Group Medical Polymer.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Our analysis indicates that 1066 is potentially undervalued!

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Shandong Weigao Group Medical Polymer is:

12% = CN¥2.7b ÷ CN¥22b (Based on trailing twelve months to June 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every HK$1 of share capital it has, the company has made a profit of HK$0.12.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Shandong Weigao Group Medical Polymer Earnings Growth and 12% ROE

For starters, Shandong Weigao Group Medical Polymer seems to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 11%. Therefore, this probably laid the foundation for the decent 14% growth seen over the past five years by Shandong Weigao Group Medical Polymer.

Then, comparing with the industry net income growth, we found that the reported growth of Shandong Weigao Group Medical Polymer was lower than the industry growth of 19% over the same period, which we don’t like to see.

SEHK: 1066 Past Earnings Growth Oct 17, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is 1066 well valued? This intrinsic business value infographic has everything you need to know.

Does Shandong Weigao Group Medical Polymer effectively use its benefits?

Shandong Weigao Group Medical Polymer has a three-year median payout ratio of 28%, implying that it retains the remaining 72% of its profits. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.

Additionally, Shandong Weigao Group Medical Polymer is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 20% over the next three years. Either way, ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we are quite satisfied with the performance of Shandong Weigao Group Medical Polymer. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent revenue growth is not surprising. The latest forecasts from industry analysts show that the company should maintain its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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Find out if Shandong Weigao Group Medical Polymer is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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