Union Semiconductor (Hefei) Co., Ltd.'s (SHSE:688403) Stock Is Going Strong: Have Financials A Role To Play?

Union Semiconductor (Hefei) (SHSE:688403) has had a great run on the share market with its stock up by a significant 38% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Union Semiconductor (Hefei)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Union Semiconductor (Hefei)

How To 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 Union Semiconductor (Hefei) is:

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

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Has ROE Got To Do With 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 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.

Union Semiconductor (Hefei)'s Earnings Growth And 4.9% ROE

When you first look at it, Union Semiconductor (Hefei)'s ROE doesn't look that attractive. Next, when compared to the average industry ROE of 6.3%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Union Semiconductor (Hefei) grew its net income at a significant rate of 37% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Union Semiconductor (Hefei)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Union Semiconductor (Hefei) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Union Semiconductor (Hefei) Making Efficient Use Of Its Profits?

Union Semiconductor (Hefei)'s three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Union Semiconductor (Hefei) is reinvesting its earnings efficiently.

Summary

On the whole, we do feel that Union Semiconductor (Hefei) has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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.