FuJian YanJing HuiQuan BreweryLtd (SHSE:600573) has had a rough week with its share price down 22%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on FuJian YanJing HuiQuan BreweryLtd's ROE.

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.

View our latest analysis for FuJian YanJing HuiQuan BreweryLtd

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 FuJian YanJing HuiQuan BreweryLtd is:

2.8% = CN¥33m ÷ CN¥1.2b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 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. 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. 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.

FuJian YanJing HuiQuan BreweryLtd's Earnings Growth And 2.8% ROE

It is quite clear that FuJian YanJing HuiQuan BreweryLtd's ROE is rather low. Even when compared to the industry average of 15%, the ROE figure is pretty disappointing. Although, we can see that FuJian YanJing HuiQuan BreweryLtd saw a modest net income growth of 13% over the past five years. We reckon that there could 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.

As a next step, we compared FuJian YanJing HuiQuan BreweryLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is FuJian YanJing HuiQuan BreweryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is FuJian YanJing HuiQuan BreweryLtd Efficiently Re-investing Its Profits?

FuJian YanJing HuiQuan BreweryLtd has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, FuJian YanJing HuiQuan BreweryLtd 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.

Summary

In total, it does look like FuJian YanJing HuiQuan BreweryLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for FuJian YanJing HuiQuan BreweryLtd.

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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.