Are Robust Financials Driving The Recent Rally In Dekon Food and Agriculture Group's (HKG:2419) Stock?

Dekon Food and Agriculture Group's (HKG:2419) stock is up by a considerable 138% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Dekon Food and Agriculture Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Dekon Food and Agriculture Group is:

49% = CN¥4.2b ÷ CN¥8.6b (Based on the trailing twelve months to December 2024).

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$0.49 in profit.

Check out our latest analysis for Dekon Food and Agriculture Group

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Dekon Food and Agriculture Group's Earnings Growth And 49% ROE

To begin with, Dekon Food and Agriculture Group has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.0% the company's ROE is quite impressive. Probably as a result of this, Dekon Food and Agriculture Group was able to see a decent net income growth of 18% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Dekon Food and Agriculture Group compares quite favourably to the industry average, which shows a decline of 3.8% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is 2419 worth today? The intrinsic value infographic in our free research report helps visualize whether 2419 is currently mispriced by the market.

Is Dekon Food and Agriculture Group Using Its Retained Earnings Effectively?

Dekon Food and Agriculture Group has a low three-year median payout ratio of 8.5%, meaning that the company retains the remaining 91% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 3,138% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 18%) over the same period.

Summary

In total, we are pretty happy with Dekon Food and Agriculture Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.