Guizhou Zhenhua Fengguang Semiconductor Co., Ltd.'s (SHSE:688439) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 15% over the past three months, it is easy to disregard Guizhou Zhenhua Fengguang Semiconductor (SHSE:688439). 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 Guizhou Zhenhua Fengguang Semiconductor'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Guizhou Zhenhua Fengguang Semiconductor

How Do You Calculate Return On Equity?

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 Guizhou Zhenhua Fengguang Semiconductor is:

8.9% = CN¥432m ÷ CN¥4.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Guizhou Zhenhua Fengguang Semiconductor's Earnings Growth And 8.9% ROE

On the face of it, Guizhou Zhenhua Fengguang Semiconductor's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.4% doesn't go unnoticed by us. Especially when you consider Guizhou Zhenhua Fengguang Semiconductor's exceptional 36% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Guizhou Zhenhua Fengguang Semiconductor'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. 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. Is Guizhou Zhenhua Fengguang Semiconductor fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guizhou Zhenhua Fengguang Semiconductor Efficiently Re-investing Its Profits?

Guizhou Zhenhua Fengguang Semiconductor has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

While Guizhou Zhenhua Fengguang Semiconductor 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 Guizhou Zhenhua Fengguang Semiconductor's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.