Is Weakness In Heilongjiang Agriculture Company Limited (SHSE:600598) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Heilongjiang Agriculture (SHSE:600598) has had a rough month with its share price down 2.1%. 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. Specifically, we decided to study Heilongjiang Agriculture's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You 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 Heilongjiang Agriculture is:

15% = CN¥1.1b ÷ CN¥7.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 in profit.

Check out our latest analysis for Heilongjiang Agriculture

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. 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.

Heilongjiang Agriculture's Earnings Growth And 15% ROE

To start with, Heilongjiang Agriculture's ROE looks acceptable. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. Yet, Heilongjiang Agriculture has posted measly growth of 3.9% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Heilongjiang Agriculture's growth is quite high when compared to the industry average growth of 1.5% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 600598 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Heilongjiang Agriculture Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 74% (or a retention ratio of 26%), most of Heilongjiang Agriculture's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Heilongjiang Agriculture has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we are quite pleased with Heilongjiang Agriculture's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.