It is hard to get excited after looking at Anhui Kouzi Distillery's (SHSE:603589) recent performance, when its stock has declined 14% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Anhui Kouzi Distillery's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

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 Anhui Kouzi Distillery is:

19% = CN¥1.8b ÷ CN¥9.8b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.19 in profit.

Why Is ROE Important For 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.

Anhui Kouzi Distillery's Earnings Growth And 19% ROE

To begin with, Anhui Kouzi Distillery seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 17%. Despite the modest returns, Anhui Kouzi Distillery's five year net income growth was quite low, averaging at only 3.4%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared Anhui Kouzi Distillery's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same 5-year 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 Anhui Kouzi Distillery fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Anhui Kouzi Distillery Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 51% (or a retention ratio of 49%), most of Anhui Kouzi Distillery's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Anhui Kouzi Distillery has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 53% of its profits over the next three years. As a result, Anhui Kouzi Distillery's ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Conclusion

Overall, we feel that Anhui Kouzi Distillery certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.