Will the weakness in Tsingtao Brewery Company Limited (HKG:168) shares prove temporary given the strong fundamentals?

With its stock down 17% over the past month, it’s easy to overlook Tsingtao Brewery (HKG: 168). 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 particular, we will pay attention to the ROE of Tsingtao Brewery today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Tsingtao Brewery

How do you 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 Tsingtao Brewery is:

14% = CN¥3.3b ÷ CN¥24b (based on trailing 12 months to December 2021).

The “return” is the annual profit. This means that for every HK$1 of equity, the company generated HK$0.14 of profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Profit growth and ROE of 14% of Tsingtao Brewery

For starters, Tsingtao Brewery seems to have a respectable ROE. Compared to the industry average ROE of 6.4%, the company’s ROE looks quite remarkable. Probably because of this, Tsingtao Brewery has been able to see an impressive net income growth of 22% over the past five years. We believe there could be other factors at play here as well. Such as – high revenue retention or effective management in place.

Then, comparing with the industry net income growth, we found that the growth of Tsingtao Brewery is quite high compared to the industry average growth of 17% over the same period, which is great to see.

SEHK: 168 Past Earnings Growth April 4, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Tsingtao Brewery is trading on a high P/E or a low P/E, relative to its industry.

Is Tsingtao Brewery using its profits efficiently?

The three-year median payout ratio for Tsingtao Brewery is 37%, which is moderately low. The company retains the remaining 63%. On the face of it, the dividend is well covered and Tsingtao Brewery is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.

Also, Tsingtao Brewery has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 46% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.

Conclusion

Overall, we believe Tsingtao Brewery’s performance has been quite good. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

About Meredith Campagna

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