It is hard to get excited after looking at Inner Mongolia Yili Industrial Group's (SHSE:600887) recent performance, when its stock has declined 4.8% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Inner Mongolia Yili Industrial Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Inner Mongolia Yili Industrial Group

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 Inner Mongolia Yili Industrial Group is:

17% = CN¥9.4b ÷ CN¥55b (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.17 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. 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.

Inner Mongolia Yili Industrial Group's Earnings Growth And 17% ROE

At first glance, Inner Mongolia Yili Industrial Group seems to have a decent ROE. Especially when compared to the industry average of 8.7% the company's ROE looks pretty impressive. This certainly adds some context to Inner Mongolia Yili Industrial Group's decent 9.3% net income growth seen over the past five years.

We then performed a comparison between Inner Mongolia Yili Industrial Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.8% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 600887? You can find out in our latest intrinsic value infographic research report.

Is Inner Mongolia Yili Industrial Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Inner Mongolia Yili Industrial Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Inner Mongolia Yili Industrial Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 73%. However, Inner Mongolia Yili Industrial Group's ROE is predicted to rise to 23% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Inner Mongolia Yili Industrial Group's performance has been quite good. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.