Anhui Kouzi Distillery's (SHSE:603589) stock is up by a considerable 14% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Anhui Kouzi Distillery's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Anhui Kouzi Distillery is:

17% = CN¥1.7b ÷ CN¥10b (Based on the trailing twelve months to September 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¥0.17 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. 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.

Anhui Kouzi Distillery's Earnings Growth And 17% ROE

To begin with, Anhui Kouzi Distillery seems to have a respectable ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. Anhui Kouzi Distillery's decent returns aren't reflected in Anhui Kouzi Distillery'smediocre five year net income growth average of 4.0%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Anhui Kouzi Distillery's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Anhui Kouzi Distillery's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anhui Kouzi Distillery Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (that is, the company retains only 48% of its income) over the past three years for Anhui Kouzi Distillery suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Anhui Kouzi Distillery has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no 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 51%. As a result, Anhui Kouzi Distillery's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Conclusion

On the whole, we do feel that Anhui Kouzi Distillery has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.