Most readers would already be aware that Shenzhen Cereals HoldingsLtd's (SZSE:000019) stock increased significantly by 11% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Shenzhen Cereals HoldingsLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Shenzhen Cereals HoldingsLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shenzhen Cereals HoldingsLtd is:

9.6% = CN¥456m ÷ CN¥4.7b (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 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. 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.

Shenzhen Cereals HoldingsLtd's Earnings Growth And 9.6% ROE

At first glance, Shenzhen Cereals HoldingsLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 7.3% which we definitely can't overlook. However, Shenzhen Cereals HoldingsLtd's five year net income growth was quite low averaging at only 3.1%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

We then compared Shenzhen Cereals HoldingsLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.4% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Shenzhen Cereals HoldingsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen Cereals HoldingsLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 63% (or a retention ratio of 37%), most of Shenzhen Cereals HoldingsLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Shenzhen Cereals HoldingsLtd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Shenzhen Cereals HoldingsLtd can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Shenzhen Cereals HoldingsLtd visit our risks dashboard for free.

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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.