Most readers would already be aware that Xiamen Yan Palace Bird's Nest Industry's (HKG:1497) stock increased significantly by 14% over the past week. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Xiamen Yan Palace Bird's Nest 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?

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 Xiamen Yan Palace Bird's Nest Industry is:

27% = CN¥212m ÷ CN¥797m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.27 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Xiamen Yan Palace Bird's Nest Industry's Earnings Growth And 27% ROE

To begin with, Xiamen Yan Palace Bird's Nest Industry has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.3% also doesn't go unnoticed by us. As a result, Xiamen Yan Palace Bird's Nest Industry's exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Xiamen Yan Palace Bird's Nest Industry's growth is quite high when compared to the industry average growth of 1.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Xiamen Yan Palace Bird's Nest Industry's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Xiamen Yan Palace Bird's Nest Industry Efficiently Re-investing Its Profits?

Xiamen Yan Palace Bird's Nest Industry's three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. So it seems that Xiamen Yan Palace Bird's Nest Industry is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 27%.

Summary

In total, we are pretty happy with Xiamen Yan Palace Bird's Nest Industry'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 growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com