StarPower Semiconductor Ltd.'s (SHSE:603290) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

StarPower Semiconductor (SHSE:603290) has had a rough month with its share price down 15%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study StarPower Semiconductor's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for StarPower Semiconductor

How Do You Calculate Return On Equity?

Return on equity 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 StarPower Semiconductor is:

10% = CN¥683m ÷ CN¥6.7b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

StarPower Semiconductor's Earnings Growth And 10% ROE

When you first look at it, StarPower Semiconductor's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. Particularly, the substantial 37% net income growth seen by StarPower Semiconductor over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that StarPower Semiconductor's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. What is 603290 worth today? The intrinsic value infographic in our free research report helps visualize whether 603290 is currently mispriced by the market.

Is StarPower Semiconductor Efficiently Re-investing Its Profits?

StarPower Semiconductor has a three-year median payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and StarPower Semiconductor is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, StarPower Semiconductor has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. Regardless, the future ROE for StarPower Semiconductor is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that StarPower Semiconductor's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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.