The Motley Fool

China Mengniu: One Important Metric Investors Must Know Now

China Mengniu Dairy Company Limited (SEHK: 2319) is one of the leading dairy companies in mainland China. It is based in Inner Mongolia and manufactures dairy products under the Mengniu brand.

In this article, we will look at one important number that will help us better understand the company’s business performance.

Return on equity (ROE)

For starters, return on equity (ROE) is a useful metric since it gives investors important insight into a company’s ability to generate a profit using shareholder capital.

For example, an ROE of 20% means that a company generates $0.20 in profit for every dollar of shareholder capital invested.

In general, the higher the ROE, the more profitable a company is..

The profitability chart

Here, we will analyse Mengniu’s ROE chart for the last five years to help us understand its performance during that period.

Source: Mengniu China’s Annual Reports

From the chart above, we can see that Mengniu’s ROE marginally declined over the years, from a range of 13%-14% in the early decade to about 10%-12% in later years.

Sharp-eyed readers will notice that ROE in 2016 fell into negative territory (-3.6%). This was mainly due to a one-off provision for Mengniu’s milk powder business for RMB2.3 billion. Excluding the provision, ROE would have been about 7% for 2016.

The decline in ROE over the years was mainly due to lower margins. For example, the net profit margin in 2009 was 4.7%, while the net profit margin in 2017 was 3.4%. Nevertheless, the company turned around that margin situation in 2018, resulting in a higher net margin of 4.6%.

Foolish conclusion

Overall, we can see that Mengniu’s ROE largely remained flat and even declined over the last decade. This indicates its profitability has slowly eroded over the years.

Nevertheless, the company seems to have bucked this trend in 2018. Thus, it will be important for investors to track the sustainability of this trend going forward.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.