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Is Weakness In China Feihe Limited (HKG:6186) Stock A Sign That The Market Could Be Wrong Given Its Strong Financial Prospects?

Simply Wall St ·  10/10/2023 06:43

It is hard to get excited after looking at China Feihe's (HKG:6186) recent performance, when its stock has declined 5.5% over the past month.   However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising.     Particularly, we will be paying attention to China Feihe'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.  Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for China Feihe

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Feihe is:

17% = CN¥4.3b ÷ CN¥26b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year.  So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.17.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings.  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.

China Feihe's Earnings Growth And 17% ROE

At first glance, China Feihe seems to have a decent ROE.   Further, the company's ROE compares quite favorably to the industry average of 9.0%.   This probably laid the ground for China Feihe's moderate 11% net income growth seen over the past five years.    

Given that the industry shrunk its earnings at a rate of 0.8% over the last few years, the net income growth of the company is quite impressive.  

SEHK:6186 Past Earnings Growth October 9th 2023

Earnings growth is an important metric to consider when valuing a stock.   It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline).  Doing so will help them establish if the stock's future looks promising or ominous.    Is 6186 fairly valued? This infographic on the company's intrinsic value  has everything you need to know.  

Is China Feihe Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 45% (implying that the company retains 55% of its profits), it seems that China Feihe is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.  

Additionally, China Feihe has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.      Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 55% over the next three years.   Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.    

Summary  

In total, we are pretty happy with China Feihe's performance.      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.       That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth.     To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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