With its stock down 12% over the past three months, it is easy to disregard Qinghai Huzhu TianYouDe Highland Barley Spirit (SZSE:002646). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Qinghai Huzhu TianYouDe Highland Barley Spirit's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Qinghai Huzhu TianYouDe Highland Barley Spirit is:

4.3% = CN¥124m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Qinghai Huzhu TianYouDe Highland Barley Spirit's Earnings Growth And 4.3% ROE

As you can see, Qinghai Huzhu TianYouDe Highland Barley Spirit's ROE looks pretty weak. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Qinghai Huzhu TianYouDe Highland Barley Spirit grew its net income at a significant rate of 32% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Qinghai Huzhu TianYouDe Highland Barley Spirit's growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

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

Is Qinghai Huzhu TianYouDe Highland Barley Spirit Efficiently Re-investing Its Profits?

Qinghai Huzhu TianYouDe Highland Barley Spirit has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. So it seems that Qinghai Huzhu TianYouDe Highland Barley Spirit is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Qinghai Huzhu TianYouDe Highland Barley Spirit is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 58% over the next three years. Still, forecasts suggest that Qinghai Huzhu TianYouDe Highland Barley Spirit's future ROE will rise to 7.0% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we feel that Qinghai Huzhu TianYouDe Highland Barley Spirit certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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