With its stock down 30% over the past three months, it is easy to disregard Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Zhe Jiang Li Zi Yuan FoodLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

ROE 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 Zhe Jiang Li Zi Yuan FoodLtd is:

14% = CN¥255m ÷ CN¥1.9b (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¥0.14.

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. 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.

Zhe Jiang Li Zi Yuan FoodLtd's Earnings Growth And 14% ROE

To start with, Zhe Jiang Li Zi Yuan FoodLtd's ROE looks acceptable. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This probably laid the ground for Zhe Jiang Li Zi Yuan FoodLtd's moderate 8.7% net income growth seen over the past five years.

Next, on comparing Zhe Jiang Li Zi Yuan FoodLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.3% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Zhe Jiang Li Zi Yuan FoodLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhe Jiang Li Zi Yuan FoodLtd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 36% (implying that the company retains 64% of its profits), it seems that Zhe Jiang Li Zi Yuan FoodLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Zhe Jiang Li Zi Yuan FoodLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 15%.

Summary

On the whole, we feel that Zhe Jiang Li Zi Yuan FoodLtd'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. 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 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.