With its stock down 21% over the past three months, it is easy to disregard LiJiang YuLong Tourism (SZSE:002033). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to LiJiang YuLong Tourism'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for LiJiang YuLong Tourism

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 LiJiang YuLong Tourism is:

7.8% = CN¥195m ÷ CN¥2.5b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

LiJiang YuLong Tourism's Earnings Growth And 7.8% ROE

At first glance, LiJiang YuLong Tourism's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.6% doesn't go unnoticed by us. But then again, seeing that LiJiang YuLong Tourism's net income shrunk at a rate of 39% in the past five years, makes us think again. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to shrink.

Next, on comparing with the industry net income growth, we found that LiJiang YuLong Tourism's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 37% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about LiJiang YuLong Tourism's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is LiJiang YuLong Tourism Efficiently Re-investing Its Profits?

With a three-year median payout ratio as high as 134%,LiJiang YuLong Tourism'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.

Moreover, LiJiang YuLong Tourism has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 27% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, LiJiang YuLong Tourism's performance is quite a big let-down. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.