Is Anhui Anfu Battery Technology Co.,Ltd's (SHSE:603031) Recent Stock Performance Tethered To Its Strong Fundamentals?

Anhui Anfu Battery TechnologyLtd (SHSE:603031) has had a great run on the share market with its stock up by a significant 31% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Anhui Anfu Battery TechnologyLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Anhui Anfu Battery TechnologyLtd

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Anhui Anfu Battery TechnologyLtd is:

20% = CN¥795m ÷ CN¥4.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Anhui Anfu Battery TechnologyLtd's Earnings Growth And 20% ROE

To begin with, Anhui Anfu Battery TechnologyLtd seems to have a respectable ROE. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This certainly adds some context to Anhui Anfu Battery TechnologyLtd's exceptional 58% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Anhui Anfu Battery TechnologyLtd's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One 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 prospects. So, you may want to check if Anhui Anfu Battery TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Anhui Anfu Battery TechnologyLtd Making Efficient Use Of Its Profits?

Anhui Anfu Battery TechnologyLtd's three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. So it seems that Anhui Anfu Battery TechnologyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Anhui Anfu Battery TechnologyLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Anhui Anfu Battery TechnologyLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Anhui Anfu Battery TechnologyLtd.

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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.