Will Weakness in Shanxi Xinghuacun Fen Wine Factory Co.,Ltd.'s (SHSE:600809) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 27% over the past three months, it is easy to disregard Shanxi Xinghuacun Fen Wine FactoryLtd (SHSE:600809). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Shanxi Xinghuacun Fen Wine FactoryLtd's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

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 Shanxi Xinghuacun Fen Wine FactoryLtd is:

36% = CN¥12b ÷ CN¥34b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.36 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Shanxi Xinghuacun Fen Wine FactoryLtd's Earnings Growth And 36% 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. So, the substantial 35% net income growth seen by Shanxi Xinghuacun Fen Wine FactoryLtd over the past five years isn't overly surprising.

As a next step, we compared Shanxi Xinghuacun Fen Wine FactoryLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Shanxi Xinghuacun Fen Wine FactoryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Shanxi Xinghuacun Fen Wine FactoryLtd has a three-year median payout ratio of 41% (where it is retaining 59% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Shanxi Xinghuacun Fen Wine FactoryLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Shanxi Xinghuacun Fen Wine FactoryLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 51% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we feel that Shanxi Xinghuacun Fen Wine FactoryLtd's performance has been quite good. 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.