Fu Shou Yuan International Group’s (HKG:1448) stock is up by a considerable 7.4% over the past month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Fu Shou Yuan International Group’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Fu Shou Yuan International Group is:
16% = CN¥735m ÷ CN¥4.6b (Based on the trailing twelve months to December 2019).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders’ capital it has, the company made HK$0.16 in profit.
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. 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.
Fu Shou Yuan International Group’s Earnings Growth And 16% ROE
To start with, Fu Shou Yuan International Group’s ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 12%. This certainly adds some context to Fu Shou Yuan International Group’s decent 18% net income growth seen over the past five years.
As a next step, we compared Fu Shou Yuan International Group’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Fu Shou Yuan International Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Fu Shou Yuan International Group Efficiently Re-investing Its Profits?
Fu Shou Yuan International Group has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Fu Shou Yuan International Group has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 26% of its profits over the next three years. Regardless, the future ROE for Fu Shou Yuan International Group is predicted to rise to 19% despite there being not much change expected in its payout ratio.
In total, we are pretty happy with Fu Shou Yuan International Group’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected be similar to its current growth rate. 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. 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.
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