China Resources Beer (Holdings) Company Limited's (HKG:291) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at China Resources Beer (Holdings)'s (HKG:291) recent performance, when its stock has declined 25% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to China Resources Beer (Holdings)'s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for China Resources Beer (Holdings)

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 China Resources Beer (Holdings) is:

15% = CN¥5.2b ÷ CN¥35b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.15 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 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 China Resources Beer (Holdings)'s Earnings Growth And 15% ROE

To begin with, China Resources Beer (Holdings) seems to have a respectable ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. This probably goes some way in explaining China Resources Beer (Holdings)'s significant 33% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that China Resources Beer (Holdings)'s growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 291 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is China Resources Beer (Holdings) Efficiently Re-investing Its Profits?

China Resources Beer (Holdings)'s three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% 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.

Additionally, China Resources Beer (Holdings) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. However, China Resources Beer (Holdings)'s ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that China Resources Beer (Holdings)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.