Is Anhui Hengyuan Coal Industry and Electricity Power Co.,Ltd's (SHSE:600971) Recent Stock Performance Tethered To Its Strong Fundamentals?

Anhui Hengyuan Coal Industry and Electricity PowerLtd's (SHSE:600971) stock is up by a considerable 18% over the past 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. In this article, we decided to focus on Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Anhui Hengyuan Coal Industry and Electricity PowerLtd

How Do You Calculate Return On Equity?

Return on equity 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 Hengyuan Coal Industry and Electricity PowerLtd is:

14% = CN¥1.9b ÷ CN¥13b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 Hengyuan Coal Industry and Electricity PowerLtd's Earnings Growth And 14% ROE

To begin with, Anhui Hengyuan Coal Industry and Electricity PowerLtd seems to have a respectable ROE. On comparing with the average industry ROE of 9.8% the company's ROE looks pretty remarkable. Probably as a result of this, Anhui Hengyuan Coal Industry and Electricity PowerLtd was able to see an impressive net income growth of 21% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Anhui Hengyuan Coal Industry and Electricity PowerLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 600971 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Anhui Hengyuan Coal Industry and Electricity PowerLtd Making Efficient Use Of Its Profits?

Anhui Hengyuan Coal Industry and Electricity PowerLtd has a three-year median payout ratio of 44% (where it is retaining 56% of its income) which is not too low or not too high. So it seems that Anhui Hengyuan Coal Industry and Electricity PowerLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Anhui Hengyuan Coal Industry and Electricity PowerLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Anhui Hengyuan Coal Industry and Electricity PowerLtd's performance. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.