Kuaijishan Shaoxing Rice Wine Co., Ltd.'s (SHSE:601579) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Kuaijishan Shaoxing Rice Wine's (SHSE:601579) stock is up by a considerable 35% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Kuaijishan Shaoxing Rice Wine'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Kuaijishan Shaoxing Rice Wine

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 Kuaijishan Shaoxing Rice Wine is:

4.8% = CN¥181m ÷ CN¥3.7b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

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. 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. 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.

Kuaijishan Shaoxing Rice Wine's Earnings Growth And 4.8% ROE

As you can see, Kuaijishan Shaoxing Rice Wine's ROE looks pretty weak. Even compared to the average industry ROE of 16%, the company's ROE is quite dismal. Therefore, Kuaijishan Shaoxing Rice Wine's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Kuaijishan Shaoxing Rice Wine'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 15% in the same 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. 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 Kuaijishan Shaoxing Rice Wine is trading on a high P/E or a low P/E, relative to its industry.

Is Kuaijishan Shaoxing Rice Wine Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 32% (or a retention ratio of 68%), Kuaijishan Shaoxing Rice Wine hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Kuaijishan Shaoxing Rice Wine has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about Kuaijishan Shaoxing Rice Wine. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

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