Yum China Holdings, Inc. (NYSE:YUMC) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Feb 3, 2025, 6:25 AM 4 min read

It is hard to get excited after looking at Yum China Holdings' (NYSE:YUMC) recent performance, when its stock has declined 4.3% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Yum China Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Yum China Holdings

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 Yum China Holdings is:

14% = US$961m ÷ US$6.7b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.14 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Yum China Holdings' Earnings Growth And 14% ROE

To start with, Yum China Holdings' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 13%. Yum China Holdings' decent returns aren't reflected in Yum China Holdings'mediocre five year net income growth average of 3.3%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Yum China Holdings' reported growth was lower than the industry growth of 33% over the last few years, which is not something we like to see.

past-earnings-growth — NYSE:YUMC Past Earnings Growth February 3rd 2025

Earnings growth is an important metric to consider when valuing a stock. 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. What is YUMC worth today? The intrinsic value infographic in our free research report helps visualize whether YUMC is currently mispriced by the market.

Is Yum China Holdings Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 27% (implying that the company retains the remaining 73% of its income), Yum China Holdings' earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Yum China Holdings has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. As a result, Yum China Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

In total, it does look like Yum China Holdings has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.