Does the market have a low tolerance for Anhui Huaqi Environmental Protection & Technology Co., Ltd.’s mixed fundamentals? (SZSE:300929)?

With shares down 28% in the past three months, it’s easy to ignore Anhui Huaqi Environmental Protection & Technology (SZSE:300929). However, we decided to study the company’s financials to determine if they have anything to do with the price drop. Long-term fundamentals usually drive market outcomes, so it’s worth paying close attention. In this article, we decided to focus on Anhui Huaqi Environmental Protection & Technology’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it shows how successful the company is in converting shareholder investments into profits.

Check out our latest analysis for Anhui Huaqi Environmental Protection & Technology

How is ROE calculated?

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 Huaqi Environmental Protection & Technology is:

2.2% = CN¥19 mln ÷ CN¥859 mln (based on the trailing twelve months to September 2023).

The ‘return’ is the profit over the past twelve months. One way to conceptualize this is that for every CN¥1 of shareholder capital it has, the company has made CN¥0.02 in profit.

What does ROE have 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 can 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 with a higher growth rate compared to companies that don’t have the same features.

Anhui Huaqi’s Environmental Protection and Technology Earnings Growth and ROE of 2.2%

It’s quite clear that Anhui Huaqi Environmental Protection & Technology’s ROE is quite low. Not only that, even compared to the industry average of 6.1%, the company’s ROE is completely unremarkable. Given the circumstances, the significant 16% decline in net income that Anhui Huaqi Environmental Protection & Technology has seen over the past five years is not surprising. We think that other factors may also play a role here. For example, the company has allocated capital poorly, or the company has a very high payout ratio.

That said, we compared Anhui Huaqi Environmental Protection & Technology’s performance against the industry and were concerned to find that while the company has shrunk its profits, the industry has grown its profits by 7.0% over the same period of five years. .

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing this, they will get an idea if the stock is headed to clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the price/earnings ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So you might want to check if Anhui Huaqi Environmental Protection & Technology is trading with a high P/E ratio or a low P/E ratio, compared to its industry.

Does Anhui Huaqi environmental protection and technology make efficient use of its profits?

When we summarize Anhui Huaqi Environmental Protection & Technology’s low three-year average payout ratio of 14% (with the company retaining 86% of profits), calculated over the past three years, we are surprised at the lack of growth. The low payout should mean that the company retains most of its profits and should therefore see some growth. It seems that there are other reasons to explain the lack in that regard. For example, the company may be in decline.

Furthermore, Anhui Huaqi Environmental Protection & Technology has paid dividends over a three-year period, suggesting management’s preference to maintain dividend payments even as profits have fallen.

Conclusion

Overall, we have mixed feelings about Anhui Huaqi Environmental Protection & Technology. Although the company has a high level of profit retention, the low returns are likely to hinder earnings growth. In closing, we want to tread carefully with this company and one way to do that is by looking at the company’s risk profile. Our risk dashboard would include the five risks we identified for Anhui Huaqi Environmental Protection & Technology.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.