Juneyao Grand Healthy DrinksCo.,Ltd.'s (SHSE:605388) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Juneyao Grand Healthy DrinksCo.Ltd (SHSE:605388) has had a great run on the share market with its stock up by a significant 10% over the last week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Juneyao Grand Healthy DrinksCo.Ltd's ROE.

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.

See our latest analysis for Juneyao Grand Healthy DrinksCo.Ltd

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 Juneyao Grand Healthy DrinksCo.Ltd is:

2.6% = CN¥49m ÷ CN¥1.9b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Juneyao Grand Healthy DrinksCo.Ltd's Earnings Growth And 2.6% ROE

It is quite clear that Juneyao Grand Healthy DrinksCo.Ltd's ROE is rather low. Even when compared to the industry average of 8.0%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 38% seen by Juneyao Grand Healthy DrinksCo.Ltd over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Juneyao Grand Healthy DrinksCo.Ltd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.6% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Juneyao Grand Healthy DrinksCo.Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Juneyao Grand Healthy DrinksCo.Ltd Making Efficient Use Of Its Profits?

Juneyao Grand Healthy DrinksCo.Ltd has a high three-year median payout ratio of 76% (that is, it is retaining 24% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 4 risks we have identified for Juneyao Grand Healthy DrinksCo.Ltd.

Additionally, Juneyao Grand Healthy DrinksCo.Ltd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Juneyao Grand Healthy DrinksCo.Ltd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. You can do your own research on Juneyao Grand Healthy DrinksCo.Ltd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.