Is Hebei Yangyuan ZhiHui Beverage Co., Ltd.'s (SHSE:603156) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Hebei Yangyuan ZhiHui Beverage's (SHSE:603156) recent performance, when its stock has declined 17% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Hebei Yangyuan ZhiHui Beverage's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Hebei Yangyuan ZhiHui Beverage

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 Hebei Yangyuan ZhiHui Beverage is:

14% = CN¥1.6b ÷ CN¥12b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

Why Is ROE Important For 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.

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

At first glance, Hebei Yangyuan ZhiHui Beverage seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. As you might expect, the 13% 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 2.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hebei Yangyuan ZhiHui Beverage's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

Hebei Yangyuan ZhiHui Beverage's high three-year median payout ratio of 133% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 2 risks we have identified for Hebei Yangyuan ZhiHui Beverage.

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

Summary

On the whole, we feel that the performance shown by Hebei Yangyuan ZhiHui Beverage can be open to many interpretations. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com