Jiangsu King's Luck Brewery Ltd (SHSE:603369) has had a rough three months with its share price down 18%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Jiangsu King's Luck Brewery Ltd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

ROE 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 Jiangsu King's Luck Brewery Ltd is:

23% = CN¥3.4b ÷ CN¥15b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Jiangsu King's Luck Brewery Ltd's Earnings Growth And 23% ROE

Firstly, we acknowledge that Jiangsu King's Luck Brewery Ltd has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. As a result, Jiangsu King's Luck Brewery Ltd's exceptional 20% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Jiangsu King's Luck Brewery Ltd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 603369? You can find out in our latest intrinsic value infographic research report.

Is Jiangsu King's Luck Brewery Ltd Efficiently Re-investing Its Profits?

Jiangsu King's Luck Brewery Ltd's three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. So it seems that Jiangsu King's Luck Brewery Ltd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Jiangsu King's Luck Brewery Ltd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 36%. As a result, Jiangsu King's Luck Brewery Ltd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 24% for future ROE.

Conclusion

On the whole, we feel that Jiangsu King's Luck Brewery Ltd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com