AnHui Jinchun Nonwoven Co., Ltd. (SZSE:300877) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

AnHui Jinchun Nonwoven (SZSE:300877) has had a great run on the share market with its stock up by a significant 13% 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. In this article, we decided to focus on AnHui Jinchun Nonwoven's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for AnHui Jinchun Nonwoven

How Do You 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 Jinchun Nonwoven is:

1.5% = CN¥23m ÷ CN¥1.6b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.01.

What Has ROE Got To Do With 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.

A Side By Side comparison of AnHui Jinchun Nonwoven's Earnings Growth And 1.5% ROE

It is quite clear that AnHui Jinchun Nonwoven's ROE is rather low. Even when compared to the industry average of 7.8%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 54% seen by AnHui Jinchun Nonwoven over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared AnHui Jinchun Nonwoven's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.7% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Jinchun Nonwoven is trading on a high P/E or a low P/E, relative to its industry.

Is AnHui Jinchun Nonwoven Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 36% (where it is retaining 64% of its profits), AnHui Jinchun Nonwoven has seen a decline 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.

Moreover, AnHui Jinchun Nonwoven has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we have mixed feelings about AnHui Jinchun Nonwoven. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for AnHui Jinchun Nonwoven visit our risks dashboard for free.

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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.