Could The Market Be Wrong About Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) Given Its Attractive Financial Prospects?

With its stock down 13% over the past month, it is easy to disregard Anhui Honglu Steel Construction(Group) (SZSE:002541). 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. Particularly, we will be paying attention to Anhui Honglu Steel Construction(Group)'s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See 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:

10.0% = CN¥946m ÷ CN¥9.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Anhui Honglu Steel Construction(Group)'s Earnings Growth And 10.0% ROE

On the face of it, Anhui Honglu Steel Construction(Group)'s ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 7.5% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by Anhui Honglu Steel Construction(Group). Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Anhui Honglu Steel Construction(Group)'s growth is quite high when compared to the industry average growth of 9.8% in the same period, which is great to see.

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. Is Anhui Honglu Steel Construction(Group) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Anhui Honglu Steel Construction(Group) Using Its Retained Earnings Effectively?

Anhui Honglu Steel Construction(Group)'s three-year median payout ratio to shareholders is 15% (implying that it retains 85% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its 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's future payout ratio is expected to rise to 25% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Anhui Honglu Steel Construction(Group)'s performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.