Is Jiangsu Hengshun Vinegar-Industry Co.,Ltd's (SHSE:600305) Recent Performance Underpinned By Weak Financials?

With its stock down 12% over the past week, it is easy to disregard Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Jiangsu Hengshun Vinegar-IndustryLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiangsu Hengshun Vinegar-IndustryLtd is:

1.5% = CN¥51m ÷ CN¥3.3b (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¥0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Jiangsu Hengshun Vinegar-IndustryLtd's Earnings Growth And 1.5% ROE

It is quite clear that Jiangsu Hengshun Vinegar-IndustryLtd's ROE is rather low. Not just that, even compared to the industry average of 8.0%, the company's ROE is entirely unremarkable. For this reason, Jiangsu Hengshun Vinegar-IndustryLtd's five year net income decline of 31% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Jiangsu Hengshun Vinegar-IndustryLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.9% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jiangsu Hengshun Vinegar-IndustryLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Jiangsu Hengshun Vinegar-IndustryLtd Using Its Retained Earnings Effectively?

Jiangsu Hengshun Vinegar-IndustryLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 84% (or a retention ratio of 16%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 2 risks we have identified for Jiangsu Hengshun Vinegar-IndustryLtd by visiting our risks dashboard for free on our platform here.

Additionally, Jiangsu Hengshun Vinegar-IndustryLtd has paid dividends over a period of at least ten 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 87% of its profits over the next three years. Still, forecasts suggest that Jiangsu Hengshun Vinegar-IndustryLtd's future ROE will rise to 5.9% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, Jiangsu Hengshun Vinegar-IndustryLtd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.