Is Xiamen Yan Palace Bird's Nest Industry Co., Ltd.'s (HKG:1497) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Xiamen Yan Palace Bird's Nest Industry (HKG:1497) has had a great run on the share market with its stock up by a significant 20% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Xiamen Yan Palace Bird's Nest Industry'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

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 Xiamen Yan Palace Bird's Nest Industry is:

24% = CN¥178m ÷ CN¥740m (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.24 in profit.

View our latest analysis for Xiamen Yan Palace Bird's Nest Industry

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. 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 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.

Xiamen Yan Palace Bird's Nest Industry's Earnings Growth And 24% ROE

To begin with, Xiamen Yan Palace Bird's Nest Industry has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.6% also doesn't go unnoticed by us. Yet, Xiamen Yan Palace Bird's Nest Industry has posted measly growth of 3.2% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Xiamen Yan Palace Bird's Nest Industry compares quite favourably to the industry average, which shows a decline of 1.7% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Xiamen Yan Palace Bird's Nest Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xiamen Yan Palace Bird's Nest Industry Making Efficient Use Of Its Profits?

Xiamen Yan Palace Bird's Nest Industry has a three-year median payout ratio of 60% (implying that it keeps only 40% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Xiamen Yan Palace Bird's Nest Industry only recently started paying a dividend so the management must have decided the shareholders prefer dividends over 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 65%. Accordingly, forecasts suggest that Xiamen Yan Palace Bird's Nest Industry's future ROE will be 21% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Xiamen Yan Palace Bird's Nest Industry's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.