Has Heilongjiang Agriculture Company Limited (SHSE:600598) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Heilongjiang Agriculture's (SHSE:600598) stock is up by 9.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Heilongjiang Agriculture's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Heilongjiang Agriculture

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 Heilongjiang Agriculture is:

15% = CN¥1.1b ÷ CN¥7.3b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Heilongjiang Agriculture's Earnings Growth And 15% ROE

To begin with, Heilongjiang Agriculture seems to have a respectable ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. Despite this, Heilongjiang Agriculture's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Heilongjiang Agriculture's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.9% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 600598 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Heilongjiang Agriculture Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 74% (meaning, the company retains only 26% of profits) for Heilongjiang Agriculture suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Heilongjiang Agriculture has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 65%. Accordingly, forecasts suggest that Heilongjiang Agriculture's future ROE will be 15% which is again, similar to the current ROE.

Conclusion

In total, it does look like Heilongjiang Agriculture has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. 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.