Could The Market Be Wrong About Anhui Huaheng Biotechnology Co., Ltd. (SHSE:688639) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Anhui Huaheng Biotechnology's (SHSE:688639) recent performance, when its stock has declined 8.0% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Anhui Huaheng Biotechnology'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 Huaheng Biotechnology

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Anhui Huaheng Biotechnology is:

24% = CN¥451m ÷ CN¥1.9b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.24 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. 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 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 Huaheng Biotechnology's Earnings Growth And 24% ROE

To begin with, Anhui Huaheng Biotechnology has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 6.3% also doesn't go unnoticed by us. Under the circumstances, Anhui Huaheng Biotechnology's considerable five year net income growth of 39% was to be expected.

We then compared Anhui Huaheng Biotechnology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.8% 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. If you're wondering about Anhui Huaheng Biotechnology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anhui Huaheng Biotechnology Efficiently Re-investing Its Profits?

The three-year median payout ratio for Anhui Huaheng Biotechnology is 25%, which is moderately low. The company is retaining the remaining 75%. By the looks of it, the dividend is well covered and Anhui Huaheng Biotechnology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Anhui Huaheng Biotechnology has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 27% of its profits over the next three years. Accordingly, forecasts suggest that Anhui Huaheng Biotechnology's future ROE will be 28% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Anhui Huaheng Biotechnology'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.