China Animal Husbandry Industry's (SHSE:600195) stock is up by a considerable 23% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to China Animal Husbandry Industry's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Animal Husbandry Industry is:

2.4% = CN¥157m ÷ CN¥6.6b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

China Animal Husbandry Industry's Earnings Growth And 2.4% ROE

As you can see, China Animal Husbandry Industry's ROE looks pretty weak. Even when compared to the industry average of 7.6%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to China Animal Husbandry Industry's very little net income growth of 3.7% over the past five years.

We then compared China Animal Husbandry Industry's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.0% in the same 5-year period, which is a bit concerning.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if China Animal Husbandry Industry is trading on a high P/E or a low P/E, relative to its industry.

Is China Animal Husbandry Industry Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 33% (or a retention ratio of 67% over the past three years, China Animal Husbandry Industry has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, China Animal Husbandry Industry has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 29%. Still, forecasts suggest that China Animal Husbandry Industry's future ROE will rise to 8.6% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we're a bit ambivalent about China Animal Husbandry Industry's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.