Could The Market Be Wrong About Hebei Hengshui Laobaigan Liquor Co., Ltd. (SHSE:600559) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Hebei Hengshui Laobaigan Liquor's (SHSE:600559) recent performance, when its stock has declined 16% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Hebei Hengshui Laobaigan Liquor's ROE in this article.

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.

Check out our latest analysis for Hebei Hengshui Laobaigan Liquor

How Do You 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 Hebei Hengshui Laobaigan Liquor is:

14% = CN¥700m ÷ CN¥5.0b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.14.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Hebei Hengshui Laobaigan Liquor's Earnings Growth And 14% ROE

At first glance, Hebei Hengshui Laobaigan Liquor seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 16%. This certainly adds some context to Hebei Hengshui Laobaigan Liquor's moderate 16% net income growth seen over the past five years.

Next, on comparing Hebei Hengshui Laobaigan Liquor's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

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. Is 600559 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hebei Hengshui Laobaigan Liquor Making Efficient Use Of Its Profits?

Hebei Hengshui Laobaigan Liquor has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Hebei Hengshui Laobaigan Liquor is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 67% over the next three years. Still, forecasts suggest that Hebei Hengshui Laobaigan Liquor's future ROE will rise to 20% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we are quite pleased with Hebei Hengshui Laobaigan Liquor'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com