Is Shenzhen Cereals Holdings Co.,Ltd's (SZSE:000019) Stock On A Downtrend As A Result Of Its Poor Financials?

Shenzhen Cereals HoldingsLtd (SZSE:000019) has had a rough month with its share price down 9.2%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Shenzhen Cereals HoldingsLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shenzhen Cereals HoldingsLtd

How Do You 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 Shenzhen Cereals HoldingsLtd is:

6.2% = CN¥305m ÷ CN¥4.9b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Shenzhen Cereals HoldingsLtd's Earnings Growth And 6.2% ROE

On the face of it, Shenzhen Cereals HoldingsLtd's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.1%. As a result, Shenzhen Cereals HoldingsLtd reported a very low income growth of 2.1% over the past five years.

Next, on comparing with the industry net income growth, we found that Shenzhen Cereals HoldingsLtd's reported growth was lower than the industry growth of 2.9% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shenzhen Cereals HoldingsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Cereals HoldingsLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (that is, the company retains only 33% of its income) over the past three years for Shenzhen Cereals HoldingsLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Shenzhen Cereals HoldingsLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Shenzhen Cereals HoldingsLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. You can see the 1 risk we have identified for Shenzhen Cereals HoldingsLtd by visiting our risks dashboard for free on our platform here.

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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.