Anhui Shunyu Water Affairs Co.,Ltd.'s (SZSE:301519) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Anhui Shunyu Water AffairsLtd (SZSE:301519) has had a great run on the share market with its stock up by a significant 23% over the last week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Anhui Shunyu Water AffairsLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Anhui Shunyu Water AffairsLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Anhui Shunyu Water AffairsLtd is:

3.4% = CN¥54m ÷ CN¥1.6b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Anhui Shunyu Water AffairsLtd's Earnings Growth And 3.4% ROE

It is quite clear that Anhui Shunyu Water AffairsLtd's ROE is rather low. Even compared to the average industry ROE of 7.0%, the company's ROE is quite dismal. As a result, Anhui Shunyu Water AffairsLtd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that Anhui Shunyu Water AffairsLtd's reported growth was lower than the industry growth of 8.7% over the last few years, which is not something we like 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Shunyu Water AffairsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Anhui Shunyu Water AffairsLtd Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 43% (implying that the company keeps 57% of its income) over the last three years, Anhui Shunyu Water AffairsLtd has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

In total, we're a bit ambivalent about Anhui Shunyu Water AffairsLtd's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Anhui Shunyu Water AffairsLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.