Wafer Works (Shanghai) Co., Ltd.'s (SHSE:688584) Stock Is Going Strong: Have Financials A Role To Play?

Wafer Works (Shanghai) (SHSE:688584) has had a great run on the share market with its stock up by a significant 30% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Wafer Works (Shanghai)'s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Wafer Works (Shanghai)

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 Wafer Works (Shanghai) is:

4.1% = CN¥164m ÷ CN¥4.0b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Wafer Works (Shanghai)'s Earnings Growth And 4.1% ROE

It is quite clear that Wafer Works (Shanghai)'s ROE is rather low. Even when compared to the industry average of 5.9%, the ROE figure is pretty disappointing. Wafer Works (Shanghai) was still able to see a decent net income growth of 15% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Wafer Works (Shanghai)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% over the last few years.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Wafer Works (Shanghai) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wafer Works (Shanghai) Efficiently Re-investing Its Profits?

Wafer Works (Shanghai) has a significant three-year median payout ratio of 88%, meaning that it is left with only 12% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Wafer Works (Shanghai) 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

On the whole, we do feel that Wafer Works (Shanghai) has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Wafer Works (Shanghai) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.