Yunnan Baiyao Group Co.,Ltd's (SZSE:000538) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Yunnan Baiyao GroupLtd's (SZSE:000538) stock is up by a considerable 13% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Yunnan Baiyao GroupLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Yunnan Baiyao GroupLtd

How Do You Calculate Return On Equity?

ROE 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 Yunnan Baiyao GroupLtd is:

11% = CN¥4.5b ÷ CN¥39b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Yunnan Baiyao GroupLtd's Earnings Growth And 11% ROE

To begin with, Yunnan Baiyao GroupLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.6%. Despite this, Yunnan Baiyao GroupLtd's five year net income growth was quite flat over the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

As a next step, we compared Yunnan Baiyao GroupLtd's net income growth with the industry and discovered that the industry saw an average growth of 9.0% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 000538? You can find out in our latest intrinsic value infographic research report.

Is Yunnan Baiyao GroupLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 81% (meaning, the company retains only 19% of profits) for Yunnan Baiyao GroupLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Yunnan Baiyao GroupLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 87%. Still, forecasts suggest that Yunnan Baiyao GroupLtd's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Yunnan Baiyao GroupLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.