Weakness in shares of Nongfu Spring Co., Ltd. (HKG:9633) will it prove to be temporary given the strong fundamentals?

Nongfu Spring (HKG:9633) had a difficult month with a 3.6% drop in its share price. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on the ROE of Nongfu Spring.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Nongfu Spring

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Nongfu Spring is:

38% = CN¥7.8b ÷ CN¥20b (Based on past twelve months to June 2022).

“Yield” refers to a company’s earnings over the past year. So this means that for every HK$1 of investment by its shareholder, the company generates a profit of HK$0.38.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Nongfu Spring profit growth and 38% ROE

For starters, Nongfu Spring has quite a high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 7.1% also does not go unnoticed for us. Probably because of this, Nongfu Spring has been able to see a decent net income growth of 18% over the past five years.

As a next step, we benchmarked Nongfu Spring’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 21% over the past year. the same period.

SEHK: 9633 Past Earnings Growth September 19, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Nongfu Spring’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Nongfu Spring effectively reinvest its profits?

The high three-year median payout rate of 69% (or a retention rate of 31%) for Nongfu Spring suggests that the company’s growth hasn’t really been hampered despite returning most of its income to its shareholders.

In addition to seeing earnings growth, Nongfu Spring has only recently started paying dividends. It is quite possible that the company was trying to impress its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 60% of its earnings over the next three years. As a result, forecasts suggest that Nongfu Spring’s future ROE will be 36%, which is again similar to the current ROE.

Summary

All in all, we are quite satisfied with the performance of Nongfu Spring. We are particularly impressed with the company’s tremendous earnings growth, which was likely supported by its strong ROE. Although the company pays most of its profits in the form of dividends, it was able to increase its profits despite this, so this is probably a good sign. The latest forecasts from industry analysts show that the company should maintain its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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