Most readers would already be aware that Jiangxi Sunshine Dairy's (SZSE:001318) stock increased significantly by 11% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Jiangxi Sunshine Dairy's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Jiangxi Sunshine Dairy
How To 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 Jiangxi Sunshine Dairy is:
8.3% = CN¥110m ÷ CN¥1.3b (Based on the trailing twelve months to September 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.
Why Is ROE Important For 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.
Jiangxi Sunshine Dairy's Earnings Growth And 8.3% ROE
On the face of it, Jiangxi Sunshine Dairy's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.5%. However, Jiangxi Sunshine Dairy has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.
We then compared Jiangxi Sunshine Dairy's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.2% in the same 5-year period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Jiangxi Sunshine Dairy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Jiangxi Sunshine Dairy Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 36% (meaning the company retains64% of profits) in the last three-year period, Jiangxi Sunshine Dairy's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Only recently, Jiangxi Sunshine Dairy started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.
Conclusion
In total, we're a bit ambivalent about Jiangxi Sunshine Dairy's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Jiangxi Sunshine Dairy's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.