Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337) has had a great run on the share market with its stock up by a significant 33% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Zhe Jiang Li Zi Yuan FoodLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

Return on equity 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 Zhe Jiang Li Zi Yuan FoodLtd is:

12% = CN¥205m ÷ CN¥1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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 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.

A Side By Side comparison of Zhe Jiang Li Zi Yuan FoodLtd's Earnings Growth And 12% ROE

To begin with, Zhe Jiang Li Zi Yuan FoodLtd seems to have a respectable ROE. On comparing with the average industry ROE of 7.6% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Zhe Jiang Li Zi Yuan FoodLtd in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Zhe Jiang Li Zi Yuan FoodLtd's reported growth was lower than the industry growth of 2.5% over the last few years, which is not something we like to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. What is 605337 worth today? The intrinsic value infographic in our free research report helps visualize whether 605337 is currently mispriced by the market.

Is Zhe Jiang Li Zi Yuan FoodLtd Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 41% (meaning the company retains59% of profits) in the last three-year period, Zhe Jiang Li Zi Yuan FoodLtd's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Zhe Jiang Li Zi Yuan FoodLtd has paid dividends over a period of four 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's future payout ratio is expected to rise to 79% over the next three years. However, Zhe Jiang Li Zi Yuan FoodLtd's future ROE is expected to rise to 15% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

In total, it does look like Zhe Jiang Li Zi Yuan FoodLtd has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing 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.