Yili Chuanning BiotechnologyLtd's (SZSE:301301) stock up by 7.5% over the past three months. Since the market usually pay for a company's long-term financial health, we decided to study the company's fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Yili Chuanning BiotechnologyLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You 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 Yili Chuanning BiotechnologyLtd is:

18% = CN¥1.4b ÷ CN¥7.6b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.18 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. 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. 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.

Yili Chuanning BiotechnologyLtd's Earnings Growth And 18% ROE

To start with, Yili Chuanning BiotechnologyLtd's ROE looks acceptable. On comparing with the average industry ROE of 5.9% the company's ROE looks pretty remarkable. This certainly adds some context to Yili Chuanning BiotechnologyLtd's exceptional 47% net income growth seen over the past five years. We believe that there might also 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 Yili Chuanning BiotechnologyLtd's growth is quite high when compared to the industry average growth of 7.6% in the same period, which is great 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. Is Yili Chuanning BiotechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yili Chuanning BiotechnologyLtd Efficiently Re-investing Its Profits?

Yili Chuanning BiotechnologyLtd's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. So it seems that Yili Chuanning BiotechnologyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Yili Chuanning BiotechnologyLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 49% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Yili Chuanning BiotechnologyLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.