Most readers would already be aware that Shanxi Xinghuacun Fen Wine FactoryLtd's (SHSE:600809) stock increased significantly by 18% over the past week. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Shanxi Xinghuacun Fen Wine FactoryLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Shanxi Xinghuacun Fen Wine FactoryLtd is:

39% = CN¥12b ÷ CN¥31b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.39 in profit.

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. 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. 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.

A Side By Side comparison of Shanxi Xinghuacun Fen Wine FactoryLtd's Earnings Growth And 39% ROE

First thing first, we like that Shanxi Xinghuacun Fen Wine FactoryLtd has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 17% also doesn't go unnoticed by us. As a result, Shanxi Xinghuacun Fen Wine FactoryLtd's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Shanxi Xinghuacun Fen Wine FactoryLtd's growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 600809? You can find out in our latest intrinsic value infographic research report.

Is Shanxi Xinghuacun Fen Wine FactoryLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Shanxi Xinghuacun Fen Wine FactoryLtd is 41%, which is moderately low. The company is retaining the remaining 59%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shanxi Xinghuacun Fen Wine FactoryLtd is reinvesting its earnings efficiently.

Moreover, Shanxi Xinghuacun Fen Wine FactoryLtd 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 50% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Shanxi Xinghuacun Fen Wine FactoryLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.