Do Its Financials Have Any Role To Play In Driving Anhui Kouzi Distillery Co., Ltd.'s (SHSE:603589) Stock Up Recently?

Anhui Kouzi Distillery (SHSE:603589) has had a great run on the share market with its stock up by a significant 20% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Anhui Kouzi Distillery's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Anhui Kouzi Distillery

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 Anhui Kouzi Distillery is:

17% = CN¥1.8b ÷ CN¥10b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.17 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. 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.

Anhui Kouzi Distillery's Earnings Growth And 17% ROE

To begin with, Anhui Kouzi Distillery seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Despite the modest returns, Anhui Kouzi Distillery's five year net income growth was quite low, averaging at only 2.6%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Anhui Kouzi Distillery'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 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 603589 worth today? The intrinsic value infographic in our free research report helps visualize whether 603589 is currently mispriced by the market.

Is Anhui Kouzi Distillery Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 51% (or a retention ratio of 49%), most of Anhui Kouzi Distillery's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Anhui Kouzi Distillery has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 50%. Accordingly, forecasts suggest that Anhui Kouzi Distillery's future ROE will be 19% which is again, similar to the current ROE.

Summary

Overall, we feel that Anhui Kouzi Distillery certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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

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.