It is hard to get excited after looking at FuJian YanJing HuiQuan BreweryLtd's (SHSE:600573) recent performance, when its stock has declined 19% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study FuJian YanJing HuiQuan BreweryLtd's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for FuJian YanJing HuiQuan BreweryLtd is:
4.3% = CN¥55m ÷ CN¥1.3b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
FuJian YanJing HuiQuan BreweryLtd's Earnings Growth And 4.3% ROE
It is quite clear that FuJian YanJing HuiQuan BreweryLtd's ROE is rather low. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. However, the moderate 16% net income growth seen by FuJian YanJing HuiQuan BreweryLtd over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing FuJian YanJing HuiQuan BreweryLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% over the last few years.
Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is FuJian YanJing HuiQuan BreweryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is FuJian YanJing HuiQuan BreweryLtd Making Efficient Use Of Its Profits?
FuJian YanJing HuiQuan BreweryLtd has a three-year median payout ratio of 28%, which implies that it retains the remaining 72% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Moreover, FuJian YanJing HuiQuan BreweryLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Conclusion
Overall, we feel that FuJian YanJing HuiQuan BreweryLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.