Is Union Semiconductor (Hefei) Co., Ltd.'s (SHSE:688403) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Union Semiconductor (Hefei)'s (SHSE:688403) stock increased significantly by 22% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Union Semiconductor (Hefei)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Union Semiconductor (Hefei)

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Union Semiconductor (Hefei) is:

4.9% = CN¥155m ÷ CN¥3.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got 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 are then able to 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 that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Union Semiconductor (Hefei)'s Earnings Growth And 4.9% ROE

At first glance, Union Semiconductor (Hefei)'s ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 6.6% either. In spite of this, Union Semiconductor (Hefei) was able to grow its net income considerably, at a rate of 37% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Union Semiconductor (Hefei)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Union Semiconductor (Hefei) is trading on a high P/E or a low P/E, relative to its industry.

Is Union Semiconductor (Hefei) Using Its Retained Earnings Effectively?

The three-year median payout ratio for Union Semiconductor (Hefei) is 47%, which is moderately low. The company is retaining the remaining 53%. By the looks of it, the dividend is well covered and Union Semiconductor (Hefei) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Union Semiconductor (Hefei) has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we feel that Union Semiconductor (Hefei) certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Union Semiconductor (Hefei).

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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.