Anhui Great Wall Military Industry (SHSE:601606) has had a rough three months with its share price down 17%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Anhui Great Wall Military Industry's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
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 Great Wall Military Industry is:
4.0% = CN¥105m ÷ CN¥2.6b (Based on the trailing twelve months to September 2023).
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¥0.04 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. 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 Great Wall Military Industry's Earnings Growth And 4.0% ROE
As you can see, Anhui Great Wall Military Industry's ROE looks pretty weak. Even compared to the average industry ROE of 5.8%, the company's ROE is quite dismal. Accordingly, Anhui Great Wall Military Industry's low net income growth of 4.0% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Anhui Great Wall Military Industry's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Anhui Great Wall Military Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Anhui Great Wall Military Industry Making Efficient Use Of Its Profits?
A low three-year median payout ratio of 21% (implying that the company retains the remaining 79% of its income) suggests that Anhui Great Wall Military Industry is retaining most of its profits. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Additionally, Anhui Great Wall Military Industry has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
In total, we're a bit ambivalent about Anhui Great Wall Military Industry's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard will have the 1 risk we have identified for Anhui Great Wall Military Industry.
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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.