Kuaijishan Shaoxing Rice Wine (SHSE:601579) has had a great run on the share market with its stock up by a significant 10% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Kuaijishan Shaoxing Rice Wine's ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kuaijishan Shaoxing Rice Wine is:
4.6% = CN¥168m ÷ CN¥3.7b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.
Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Kuaijishan Shaoxing Rice Wine's Earnings Growth And 4.6% ROE
It is quite clear that Kuaijishan Shaoxing Rice Wine's ROE is rather low. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Kuaijishan Shaoxing Rice Wine's very little net income growth of 3.1% over the past five years.
As a next step, we compared Kuaijishan Shaoxing Rice Wine's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Kuaijishan Shaoxing Rice Wine's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Kuaijishan Shaoxing Rice Wine Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 31% (or a retention ratio of 69% over the past three years, Kuaijishan Shaoxing Rice Wine has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Kuaijishan Shaoxing Rice Wine has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Summary
Overall, we have mixed feelings about Kuaijishan Shaoxing Rice Wine. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Kuaijishan Shaoxing Rice Wine visit our risks dashboard for free.
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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.