Do Its Financials Have Any Role To Play In Driving Leaguer (Shenzhen) Microelectronics Corp.'s (SHSE:688589) Stock Up Recently?

Most readers would already be aware that Leaguer (Shenzhen) Microelectronics' (SHSE:688589) stock increased significantly by 35% over the past three months. 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 Leaguer (Shenzhen) Microelectronics' ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Leaguer (Shenzhen) Microelectronics

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Leaguer (Shenzhen) Microelectronics is:

7.4% = CN¥76m ÷ CN¥1.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Leaguer (Shenzhen) Microelectronics' Earnings Growth And 7.4% ROE

At first glance, Leaguer (Shenzhen) Microelectronics' ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.3%, so we won't completely dismiss the company. Looking at Leaguer (Shenzhen) Microelectronics' exceptional 27% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Leaguer (Shenzhen) Microelectronics' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Leaguer (Shenzhen) Microelectronics is trading on a high P/E or a low P/E, relative to its industry.

Is Leaguer (Shenzhen) Microelectronics Efficiently Re-investing Its Profits?

The three-year median payout ratio for Leaguer (Shenzhen) Microelectronics is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Leaguer (Shenzhen) Microelectronics is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Leaguer (Shenzhen) Microelectronics is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

Overall, we feel that Leaguer (Shenzhen) Microelectronics 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. To know the 3 risks we have identified for Leaguer (Shenzhen) Microelectronics visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.