Are Hebei Yangyuan ZhiHui Beverage Co., Ltd.'s (SHSE:603156) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Hebei Yangyuan ZhiHui Beverage's (SHSE:603156) recent performance, when its stock has declined 3.1% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Hebei Yangyuan ZhiHui Beverage's ROE today.

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.

View our latest analysis for Hebei Yangyuan ZhiHui Beverage

How To Calculate Return On Equity?

Return on equity 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 Yangyuan ZhiHui Beverage is:

14% = CN¥1.4b ÷ CN¥9.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 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. 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 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.

Hebei Yangyuan ZhiHui Beverage's Earnings Growth And 14% ROE

To start with, Hebei Yangyuan ZhiHui Beverage's ROE looks acceptable. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. As you might expect, the 11% net income decline reported by Hebei Yangyuan ZhiHui Beverage is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

That being said, we compared Hebei Yangyuan ZhiHui Beverage's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 2.5% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Hebei Yangyuan ZhiHui Beverage fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hebei Yangyuan ZhiHui Beverage Making Efficient Use Of Its Profits?

Hebei Yangyuan ZhiHui Beverage's high three-year median payout ratio of 135% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. To know the 2 risks we have identified for Hebei Yangyuan ZhiHui Beverage visit our risks dashboard for free.

In addition, Hebei Yangyuan ZhiHui Beverage has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we're a bit ambivalent about Hebei Yangyuan ZhiHui Beverage's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Hebei Yangyuan ZhiHui Beverage's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.