Shandong Yisheng Livestock & Poultry Breeding Co., Ltd. (SZSE:002458) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Shandong Yisheng Livestock & Poultry Breeding's (SZSE:002458) stock is up by a considerable 16% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Shandong Yisheng Livestock & Poultry Breeding's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shandong Yisheng Livestock & Poultry Breeding

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shandong Yisheng Livestock & Poultry Breeding is:

3.4% = CN¥150m ÷ CN¥4.4b (Based on the trailing twelve months to June 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¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Shandong Yisheng Livestock & Poultry Breeding's Earnings Growth And 3.4% ROE

It is quite clear that Shandong Yisheng Livestock & Poultry Breeding's ROE is rather low. Even compared to the average industry ROE of 8.0%, the company's ROE is quite dismal. For this reason, Shandong Yisheng Livestock & Poultry Breeding's five year net income decline of 45% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Shandong Yisheng Livestock & Poultry Breeding's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.9% in the same period. This is quite worrisome.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Shandong Yisheng Livestock & Poultry Breeding is trading on a high P/E or a low P/E, relative to its industry.

Is Shandong Yisheng Livestock & Poultry Breeding Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 37% (where it is retaining 63% of its profits), Shandong Yisheng Livestock & Poultry Breeding has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Shandong Yisheng Livestock & Poultry Breeding has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 29% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 12%, over the same period.

Conclusion

On the whole, we feel that the performance shown by Shandong Yisheng Livestock & Poultry Breeding can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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.

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

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.