Is Advanced Micro-Fabrication Equipment Inc. China's (SHSE:688012) Latest Stock Performance Being Led By Its Strong Fundamentals?

Advanced Micro-Fabrication Equipment China's (SHSE:688012) stock is up by 7.1% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Advanced Micro-Fabrication Equipment China'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Advanced Micro-Fabrication Equipment China

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 Advanced Micro-Fabrication Equipment China is:

9.8% = CN¥1.8b ÷ CN¥18b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Advanced Micro-Fabrication Equipment China's Earnings Growth And 9.8% ROE

On the face of it, Advanced Micro-Fabrication Equipment China's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.7% which we definitely can't overlook. Particularly, the substantial 43% net income growth seen by Advanced Micro-Fabrication Equipment China 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. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Advanced Micro-Fabrication Equipment China's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Advanced Micro-Fabrication Equipment China fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Advanced Micro-Fabrication Equipment China Using Its Retained Earnings Effectively?

Advanced Micro-Fabrication Equipment China has a really low three-year median payout ratio of 13%, meaning that it has the remaining 87% left over to reinvest into its business. So it looks like Advanced Micro-Fabrication Equipment China is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Advanced Micro-Fabrication Equipment China has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we feel that Advanced Micro-Fabrication Equipment China's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.