Sichuan Baicha Baidao Industrial Co., Ltd. (HKG:2555) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Sichuan Baicha Baidao Industrial (HKG:2555) has had a rough three months with its share price down 23%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Sichuan Baicha Baidao Industrial's ROE today.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sichuan Baicha Baidao Industrial is:
15% = CN¥574m ÷ CN¥3.8b (Based on the trailing twelve months to June 2025).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.15 in profit.
Check out our latest analysis for Sichuan Baicha Baidao Industrial
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
A Side By Side comparison of Sichuan Baicha Baidao Industrial's Earnings Growth And 15% ROE
To start with, Sichuan Baicha Baidao Industrial's ROE looks acceptable. Especially when compared to the industry average of 7.9% the company's ROE looks pretty impressive. As you might expect, the 14% net income decline reported by Sichuan Baicha Baidao Industrial is a bit of a surprise. Therefore, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
That being said, we compared Sichuan Baicha Baidao Industrial's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 42% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Sichuan Baicha Baidao Industrial's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sichuan Baicha Baidao Industrial Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 81% (implying that 19% of the profits are retained), most of Sichuan Baicha Baidao Industrial's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.
Only recently, Sichuan Baicha Baidao Industrial stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 63% over the next three years. The fact that the company's ROE is expected to rise to 23% over the same period is explained by the drop in the payout ratio.
Summary
On the whole, we do feel that Sichuan Baicha Baidao Industrial has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.