Are Strong Financial Prospects The Force That Is Driving The Momentum In China Resources Beer (Holdings) Company Limited's HKG:291) Stock?

China Resources Beer (Holdings) (HKG:291) has had a great run on the share market with its stock up by a significant 17% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on China Resources Beer (Holdings)'s ROE.

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.

Check out our latest analysis for China Resources Beer (Holdings)

How To 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 China Resources Beer (Holdings) is:

16% = CN¥4.4b ÷ CN¥27b (Based on the trailing twelve months to December 2022).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.16 in profit.

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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

China Resources Beer (Holdings)'s Earnings Growth And 16% ROE

At first glance, China Resources Beer (Holdings) seems to have a decent ROE. On comparing with the average industry ROE of 8.8% the company's ROE looks pretty remarkable. This certainly adds some context to China Resources Beer (Holdings)'s exceptional 33% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared China Resources Beer (Holdings)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 23% 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. 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 China Resources Beer (Holdings) is trading on a high P/E or a low P/E, relative to its industry.

Is China Resources Beer (Holdings) Making Efficient Use Of Its Profits?

China Resources Beer (Holdings)'s three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. By the looks of it, the dividend is well covered and China Resources Beer (Holdings) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, China Resources Beer (Holdings) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 40%. Still, forecasts suggest that China Resources Beer (Holdings)'s future ROE will rise to 21% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that China Resources Beer (Holdings)'s performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.