It is hard to get excited after looking at Hebei Hengshui Laobaigan Liquor's (SHSE:600559) recent performance, when its stock has declined 12% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Hebei Hengshui Laobaigan Liquor'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Hebei Hengshui Laobaigan Liquor

How To 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 Hebei Hengshui Laobaigan Liquor is:

13% = CN¥592m ÷ CN¥4.5b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Is The Relationship Between ROE And 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 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.

Hebei Hengshui Laobaigan Liquor's Earnings Growth And 13% ROE

To start with, Hebei Hengshui Laobaigan Liquor's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 13%. This probably goes some way in explaining Hebei Hengshui Laobaigan Liquor's moderate 15% growth over the past five years amongst other factors.

We then performed a comparison between Hebei Hengshui Laobaigan Liquor's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 600559 worth today? The intrinsic value infographic in our free research report helps visualize whether 600559 is currently mispriced by the market.

Is Hebei Hengshui Laobaigan Liquor Using Its Retained Earnings Effectively?

Hebei Hengshui Laobaigan Liquor has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Hebei Hengshui Laobaigan Liquor has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 36%. Regardless, the future ROE for Hebei Hengshui Laobaigan Liquor is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Hebei Hengshui Laobaigan Liquor's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.