Sichuan Teway Food Group Co.,Ltd's (SHSE:603317) Stock Is Going Strong: Is the Market Following Fundamentals?

Sichuan Teway Food GroupLtd (SHSE:603317) has had a great run on the share market with its stock up by a significant 40% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Sichuan Teway Food GroupLtd's ROE in this article.

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

Check out our latest analysis for Sichuan Teway Food GroupLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Sichuan Teway Food GroupLtd is:

13% = CN¥590m ÷ CN¥4.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 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. 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 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.

Sichuan Teway Food GroupLtd's Earnings Growth And 13% ROE

To start with, Sichuan Teway Food GroupLtd's ROE looks acceptable. On comparing with the average industry ROE of 7.6% the company's ROE looks pretty remarkable. This certainly adds some context to Sichuan Teway Food GroupLtd's decent 11% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Sichuan Teway Food GroupLtd's growth is quite high when compared to the industry average growth of 2.5% in the same period, which is great to see.

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 603317 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sichuan Teway Food GroupLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Sichuan Teway Food GroupLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Sichuan Teway Food GroupLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 72%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Summary

In total, we are pretty happy with Sichuan Teway Food GroupLtd's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.