Is Luzhou Laojiao Co.,Ltd's (SZSE:000568) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Luzhou LaojiaoLtd (SZSE:000568) has had a great run on the share market with its stock up by a significant 8.8% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Luzhou LaojiaoLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Luzhou LaojiaoLtd is:

31% = CN¥14b ÷ CN¥46b (Based on the trailing twelve months to September 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¥0.31 in profit.

View our latest analysis for Luzhou LaojiaoLtd

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 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.

A Side By Side comparison of Luzhou LaojiaoLtd's Earnings Growth And 31% ROE

To begin with, Luzhou LaojiaoLtd has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. Under the circumstances, Luzhou LaojiaoLtd's considerable five year net income growth of 24% was to be expected.

We then compared Luzhou LaojiaoLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Luzhou LaojiaoLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Luzhou LaojiaoLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 55% (implying that it keeps only 45% of profits) for Luzhou LaojiaoLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Luzhou LaojiaoLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 60%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 29%.

Summary

In total, we are pretty happy with Luzhou LaojiaoLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

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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.