Anhui Honglu Steel Construction(Group) CO., LTD's (SZSE:002541) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Anhui Honglu Steel Construction(Group)'s (SZSE:002541) stock is up by a considerable 15% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Anhui Honglu Steel Construction(Group)'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Anhui Honglu Steel Construction(Group)

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 Honglu Steel Construction(Group) is:

13% = CN¥1.2b ÷ CN¥9.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Anhui Honglu Steel Construction(Group)'s Earnings Growth And 13% ROE

To begin with, Anhui Honglu Steel Construction(Group) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.4%. This certainly adds some context to Anhui Honglu Steel Construction(Group)'s decent 20% net income growth seen over the past five years.

As a next step, we compared Anhui Honglu Steel Construction(Group)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is 002541 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Anhui Honglu Steel Construction(Group) Efficiently Re-investing Its Profits?

Anhui Honglu Steel Construction(Group) has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Anhui Honglu Steel Construction(Group) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 18% of its profits over the next three years. As a result, Anhui Honglu Steel Construction(Group)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Summary

On the whole, we feel that Anhui Honglu Steel Construction(Group)'s performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.