Declining Stock and Solid Fundamentals: Is The Market Wrong About Shanxi Xinghuacun Fen Wine Factory Co.,Ltd. (SHSE:600809)?

Shanxi Xinghuacun Fen Wine FactoryLtd (SHSE:600809) has had a rough month with its share price down 12%. 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. In this article, we decided to focus on Shanxi Xinghuacun Fen Wine FactoryLtd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shanxi Xinghuacun Fen Wine FactoryLtd is:

34% = CN¥12b ÷ CN¥35b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.34 in profit.

What Has ROE Got To Do With 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.

Shanxi Xinghuacun Fen Wine FactoryLtd's Earnings Growth And 34% ROE

First thing first, we like that Shanxi Xinghuacun Fen Wine FactoryLtd has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. Under the circumstances, Shanxi Xinghuacun Fen Wine FactoryLtd's considerable five year net income growth of 38% was to be expected.

We then compared Shanxi Xinghuacun Fen Wine FactoryLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 600809 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shanxi Xinghuacun Fen Wine FactoryLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for Shanxi Xinghuacun Fen Wine FactoryLtd is 39%, which is moderately low. The company is retaining the remaining 61%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shanxi Xinghuacun Fen Wine FactoryLtd is reinvesting its earnings efficiently.

Besides, Shanxi Xinghuacun Fen Wine FactoryLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 51% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Shanxi Xinghuacun Fen Wine FactoryLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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.