Does The Market Have A Low Tolerance For Guangdong Yuehai Feeds Group Co.,Ltd.'s (SZSE:001313) Mixed Fundamentals?

It is hard to get excited after looking at Guangdong Yuehai Feeds GroupLtd's (SZSE:001313) recent performance, when its stock has declined 9.9% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Guangdong Yuehai Feeds GroupLtd's ROE.

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.

Check out our latest analysis for Guangdong Yuehai Feeds GroupLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Guangdong Yuehai Feeds GroupLtd is:

1.0% = CN¥27m ÷ CN¥2.6b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.01 in profit.

Why Is ROE Important For 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.

Guangdong Yuehai Feeds GroupLtd's Earnings Growth And 1.0% ROE

As you can see, Guangdong Yuehai Feeds GroupLtd's ROE looks pretty weak. Even compared to the average industry ROE of 8.0%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 33% seen by Guangdong Yuehai Feeds GroupLtd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Guangdong Yuehai Feeds GroupLtd'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.

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. 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 Guangdong Yuehai Feeds GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Guangdong Yuehai Feeds GroupLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 48% (where it is retaining 52% of its profits), Guangdong Yuehai Feeds GroupLtd has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Guangdong Yuehai Feeds GroupLtd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Summary

In total, we're a bit ambivalent about Guangdong Yuehai Feeds GroupLtd's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.