Is The Market Rewarding Anhui Wanwei Updated High-Tech Material Industry Co.,Ltd (SHSE:600063) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

With its stock down 6.5% over the past three months, it is easy to disregard Anhui Wanwei Updated High-Tech Material IndustryLtd (SHSE:600063). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Anhui Wanwei Updated High-Tech Material IndustryLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Anhui Wanwei Updated High-Tech Material IndustryLtd

How Is ROE Calculated?

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 Wanwei Updated High-Tech Material IndustryLtd is:

1.4% = CN¥119m ÷ CN¥8.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Wanwei Updated High-Tech Material IndustryLtd's Earnings Growth And 1.4% ROE

It is hard to argue that Anhui Wanwei Updated High-Tech Material IndustryLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 6.2%, the company's ROE is entirely unremarkable. Therefore, Anhui Wanwei Updated High-Tech Material IndustryLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Anhui Wanwei Updated High-Tech Material IndustryLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.7% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Anhui Wanwei Updated High-Tech Material IndustryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anhui Wanwei Updated High-Tech Material IndustryLtd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 29% (or a retention ratio of 71%), Anhui Wanwei Updated High-Tech Material IndustryLtd hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Anhui Wanwei Updated High-Tech Material IndustryLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Anhui Wanwei Updated High-Tech Material IndustryLtd can be open to many interpretations. 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. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.