With its stock down 17% over the past three months, it is easy to disregard Anhui Hengyuan Coal Industry and Electricity PowerLtd (SHSE:600971). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Anhui Hengyuan Coal Industry and Electricity PowerLtd is:

14% = CN¥1.9b ÷ CN¥13b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

What Is The Relationship Between ROE And 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 Hengyuan Coal Industry and Electricity PowerLtd's Earnings Growth And 14% ROE

To begin with, Anhui Hengyuan Coal Industry and Electricity PowerLtd seems to have a respectable ROE. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This probably laid the ground for Anhui Hengyuan Coal Industry and Electricity PowerLtd's significant 21% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Anhui Hengyuan Coal Industry and Electricity PowerLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 600971 worth today? The intrinsic value infographic in our free research report helps visualize whether 600971 is currently mispriced by the market.

Is Anhui Hengyuan Coal Industry and Electricity PowerLtd Efficiently Re-investing Its Profits?

Anhui Hengyuan Coal Industry and Electricity PowerLtd's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. By the looks of it, the dividend is well covered and Anhui Hengyuan Coal Industry and Electricity PowerLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Anhui Hengyuan Coal Industry and Electricity PowerLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Anhui Hengyuan Coal Industry and Electricity PowerLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com