Leaguer (Shenzhen) Microelectronics Corp.'s (SHSE:688589) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Leaguer (Shenzhen) Microelectronics (SHSE:688589) has had a great run on the share market with its stock up by a significant 11% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Leaguer (Shenzhen) Microelectronics' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Leaguer (Shenzhen) Microelectronics

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 Leaguer (Shenzhen) Microelectronics is:

11% = CN¥109m ÷ CN¥1.0b (Based on the trailing twelve months to March 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¥0.11 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.

Leaguer (Shenzhen) Microelectronics' Earnings Growth And 11% ROE

At first glance, Leaguer (Shenzhen) Microelectronics' ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.8% which we definitely can't overlook. Even more so after seeing Leaguer (Shenzhen) Microelectronics' exceptional 33% 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. So, there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Leaguer (Shenzhen) Microelectronics' 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 20%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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.

Additionally, Leaguer (Shenzhen) Microelectronics has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Leaguer (Shenzhen) Microelectronics' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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