Jiangsu Yanghe Distillery Co., Ltd. (SZSE:002304) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 15% over the past three months, it is easy to disregard Jiangsu Yanghe Distillery (SZSE:002304). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Jiangsu Yanghe Distillery's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Jiangsu Yanghe Distillery

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 Jiangsu Yanghe Distillery is:

18% = CN¥10b ÷ CN¥58b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.18 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Jiangsu Yanghe Distillery's Earnings Growth And 18% ROE

To start with, Jiangsu Yanghe Distillery's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This probably goes some way in explaining Jiangsu Yanghe Distillery's moderate 6.3% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Jiangsu Yanghe Distillery's reported growth was lower than the industry growth of 15% 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. 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. If you're wondering about Jiangsu Yanghe Distillery's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Yanghe Distillery Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 59% (or a retention ratio of 41%) for Jiangsu Yanghe Distillery suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Jiangsu Yanghe Distillery has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 68%. Accordingly, forecasts suggest that Jiangsu Yanghe Distillery's future ROE will be 21% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Jiangsu Yanghe Distillery has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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