With stock down 30% in the past three months, it’s easy to overlook COFCO Joycome Foods (HKG: 1610). But if you pay attention, you could understand that its strong finances could mean that the stock could potentially see an increase in value in the long run, given that the markets generally reward companies with good financial health. In this article, we have decided to focus on the ROE of COFCO Joycome Foods.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Discover our latest analysis for COFCO Joycome Foods
How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of COFCO Joycome Foods is:
42% = CN Â¥ 4.0b Ã· CN Â¥ 9.6b (Based on the last twelve months up to December 2020).
The âreturnâ is the annual profit. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.42 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of that profit the company reinvests or âwithholdsâ, and how effectively it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
42% profit growth and ROE of COFCO Joycome Foods
First, we recognize that COFCO Joycome Foods has a significantly high ROE. In addition, the company’s ROE is 12% higher than the industry average, which is quite remarkable. Under these circumstances, COFCO Joycome Foods’ five-year net income growth of 54% was to be expected.
As a next step, we compared the net income growth of COFCO Joycome Foods to that of the industry and luckily we found that the growth observed by the company is above the industry average growth of 13%. .
Profit growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. This will help them determine if the future of the stock looks bright or worrisome. Has the market taken into account the future prospects of 1610? You can find out in our latest Intrinsic Value infographic research report.
Is COFCO Joycome Foods effectively reinvesting its profits?
COFCO Joycome Foods’ three-year median payout ratio to shareholders is 17%, which is quite low. This implies that the company keeps 83% of its profits. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
While COFCO Joycome Foods has seen earnings growth, it only recently started paying a dividend. Chances are, the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows the company’s future payout ratio is expected to reach 42% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s ROE is expected to drop to 14% over the same period.
All in all, we are quite satisfied with the performance of COFCO Joycome Foods. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in tremendous growth in its profits. That said, looking at current analysts’ estimates, we were concerned that while the company has increased earnings in the past, analysts expect earnings to decline in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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