With its stock down 6.7% over the past month, it is easy to disregard Eastroc Beverage (Group)Ltd (SHSE:605499). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Eastroc Beverage (Group)Ltd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Eastroc Beverage (Group)Ltd

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 Eastroc Beverage (Group)Ltd is:

32% = CN¥1.9b ÷ CN¥6.0b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.32 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Eastroc Beverage (Group)Ltd's Earnings Growth And 32% ROE

To begin with, Eastroc Beverage (Group)Ltd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. As a result, Eastroc Beverage (Group)Ltd's exceptional 28% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Eastroc Beverage (Group)Ltd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 17% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. What is 605499 worth today? The intrinsic value infographic in our free research report helps visualize whether 605499 is currently mispriced by the market.

Is Eastroc Beverage (Group)Ltd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Eastroc Beverage (Group)Ltd is 49%, which is moderately low. The company is retaining the remaining 51%. So it seems that Eastroc Beverage (Group)Ltd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Eastroc Beverage (Group)Ltd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. Accordingly, forecasts suggest that Eastroc Beverage (Group)Ltd's future ROE will be 33% which is again, similar to the current ROE.

Summary

On the whole, we feel that Eastroc Beverage (Group)Ltd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.