Modern Dental Group Limited (HKG: 3600) stock is up but financial data looks ambiguous: will momentum continue?
Modern Dental Group (HKG: 3600) has had an excellent performance in the equity market with a significant increase in its shares of 189% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will pay special attention to the ROE of Modern Dental Group today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for Modern Dental Group
How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Modern Dental Group is:
4.8% = HK $ 108 million ÷ HK $ 2.3 billion (based on the last twelve months up to December 2020).
The “return” is the profit of the last twelve months. Another way to think about this is that for every HK $ 1 worth of equity, the company was able to make HK $ 0.05 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion 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. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Modern Dental Group profit growth and 4.8% ROE
At first glance, Modern Dental Group’s ROE does not look very promising. Then, compared to the industry average ROE of 8.8%, the company’s ROE leaves us even less enthusiastic. Given the circumstances, the significant drop in net income of 8.9% observed by Modern Dental Group over the past five years is not surprising. We believe there could be other factors at play here as well. Such as – low profit retention or misallocation of capital.
However, when we compared the growth of Modern Dental Group to that of the industry, we found that even though the company’s profits declined, the industry experienced 15% profit growth over the past year. same period. It is quite worrying.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about Modern Dental Group’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is the modern dental group making effective use of its profits?
Despite a normal three-year median payout rate of 36% (i.e., 64% retention rate), the fact that Modern Dental Group’s profits have declined is quite puzzling. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
Additionally, Modern Dental Group has been paying dividends for the past five years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer constant dividends even though earnings have declined. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 33% of its profits over the next three years. Either way, Modern Dental Group’s future ROE is expected to reach 16%, although there isn’t much expected change in its payout ratio.
Overall, we have mixed feelings about Modern Dental Group. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of that reinvestment after all. The weak earnings growth suggests that our theory is correct. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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