HaiXin FoodsLtd (SZSE:002702) has had a great run on the share market with its stock up by a significant 25% over the last month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to HaiXin FoodsLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for HaiXin FoodsLtd
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for HaiXin FoodsLtd is:
1.0% = CN¥12m ÷ CN¥1.2b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.01 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
A Side By Side comparison of HaiXin FoodsLtd's Earnings Growth And 1.0% ROE
As you can see, HaiXin FoodsLtd's ROE looks pretty weak. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by HaiXin FoodsLtd over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 7.0% over the last few years.
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 HaiXin FoodsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is HaiXin FoodsLtd Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 76% (meaning, the company retains only 24% of profits) for HaiXin FoodsLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
In addition, HaiXin FoodsLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning HaiXin FoodsLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on HaiXin FoodsLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.