Are Zhejiang Guyuelongshan Shaoxing Wine Co.,Ltd's (SHSE:600059) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 7.8% over the past month, it is easy to disregard Zhejiang Guyuelongshan Shaoxing WineLtd (SHSE:600059). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Zhejiang Guyuelongshan Shaoxing WineLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Zhejiang Guyuelongshan Shaoxing WineLtd

How To Calculate Return On Equity?

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 Zhejiang Guyuelongshan Shaoxing WineLtd is:

6.8% = CN¥399m ÷ CN¥5.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Zhejiang Guyuelongshan Shaoxing WineLtd's Earnings Growth And 6.8% ROE

When you first look at it, Zhejiang Guyuelongshan Shaoxing WineLtd's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 16% either. Although, we can see that Zhejiang Guyuelongshan Shaoxing WineLtd saw a modest net income growth of 18% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Zhejiang Guyuelongshan Shaoxing WineLtd'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 15% in the same period.

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 Zhejiang Guyuelongshan Shaoxing WineLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Guyuelongshan Shaoxing WineLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that Zhejiang Guyuelongshan Shaoxing WineLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Zhejiang Guyuelongshan Shaoxing WineLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Zhejiang Guyuelongshan Shaoxing WineLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.