Are Fanhua Inc. (NASDAQ: FANH) fundamentals good enough to justify buying given recent stock weakness?

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It’s hard to get excited after looking at Fanhua’s recent performance (NASDAQ: FANH), as its stock has fallen 15% in the past three months. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future market price movements. Specifically, we decided to study Fanhua’s ROE in this article.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.

How is the ROE calculated?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Fanhua is:

17% = CN ¥ 333m CN ¥ 2.0b (Based on the last twelve months to June 2021).

The “return” is the annual profit. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.17.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A Side-by-Side Comparison of Fanhua’s Profit Growth and 17% ROE

For starters, Fanhua appears to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 12%. Despite this, Fanhua’s five-year net income growth has been fairly stable over the past five years. We believe there might be other factors at play here that are limiting the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

We then compared Fanhua’s net income growth with the industry and found that the industry’s average growth rate was 13% over the same period.

NasdaqGS: FANH Past Profit Growth October 17, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. What is FANH worth today? The intrinsic value infographic in our free research report helps to visualize if FANH is currently poorly valued by the market.

Does Fanhua Effectively Reinvest Its Profits?

Fanhua has a high three-year median payout rate of 82% (or an 18% retention rate), which means the company pays out most of its profits as dividends to its shareholders. This partly explains why there has been no growth in its profits.

Additionally, Fanhua has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 79%. However, Fanhua’s ROE is expected to increase to 23% despite there being no expected change in its payout ratio.

Conclusion

All in all, it seems that Fanhua has some positive aspects for his business. Still, the low profit growth is a bit of a concern, especially since the company has a high rate of return. Investors could have benefited from the high ROE if the company had reinvested more of its profits. As previously stated, the company retains a small portion of its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the latest analyst forecasts for the company, check out this viewing analyst forecasts for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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