It is hard to get excited after looking at Hebei Yangyuan ZhiHui Beverage's (SHSE:603156) recent performance, when its stock has declined 4.1% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Hebei Yangyuan ZhiHui Beverage's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

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 Hebei Yangyuan ZhiHui Beverage is:

14% = CN¥1.4b ÷ CN¥9.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Hebei Yangyuan ZhiHui Beverage's Earnings Growth And 14% ROE

To start with, Hebei Yangyuan ZhiHui Beverage's ROE looks acceptable. On comparing with the average industry ROE of 7.6% the company's ROE looks pretty remarkable. For this reason, Hebei Yangyuan ZhiHui Beverage's five year net income decline of 11% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

However, when we compared Hebei Yangyuan ZhiHui Beverage's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.5% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Hebei Yangyuan ZhiHui Beverage fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hebei Yangyuan ZhiHui Beverage Making Efficient Use Of Its Profits?

With a three-year median payout ratio as high as 135%,Hebei Yangyuan ZhiHui Beverage's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. To know the 2 risks we have identified for Hebei Yangyuan ZhiHui Beverage visit our risks dashboard for free.

Additionally, Hebei Yangyuan ZhiHui Beverage has paid dividends over a period of seven years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, we're a bit ambivalent about Hebei Yangyuan ZhiHui Beverage's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Hebei Yangyuan ZhiHui Beverage's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.