Telink Semiconductor(Shanghai)Co.,Ltd.'s (SHSE:688591) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Telink Semiconductor(Shanghai)Co.Ltd (SHSE:688591) has had a great run on the share market with its stock up by a significant 5.5% over the last week. 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. Particularly, we will be paying attention to Telink Semiconductor(Shanghai)Co.Ltd's ROE today.

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.

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How To 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 Telink Semiconductor(Shanghai)Co.Ltd is:

4.1% = CN¥96m ÷ CN¥2.3b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

View our latest analysis for Telink Semiconductor(Shanghai)Co.Ltd

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Telink Semiconductor(Shanghai)Co.Ltd's Earnings Growth And 4.1% ROE

As you can see, Telink Semiconductor(Shanghai)Co.Ltd's ROE looks pretty weak. Even when compared to the industry average of 7.0%, the ROE figure is pretty disappointing. In spite of this, Telink Semiconductor(Shanghai)Co.Ltd was able to grow its net income considerably, at a rate of 22% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings 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 Telink Semiconductor(Shanghai)Co.Ltd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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. If you're wondering about Telink Semiconductor(Shanghai)Co.Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Telink Semiconductor(Shanghai)Co.Ltd Making Efficient Use Of Its Profits?

Telink Semiconductor(Shanghai)Co.Ltd has a three-year median payout ratio of 32% (where it is retaining 68% of its income) which is not too low or not too high. So it seems that Telink Semiconductor(Shanghai)Co.Ltd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Telink Semiconductor(Shanghai)Co.Ltd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like Telink Semiconductor(Shanghai)Co.Ltd has some positive aspects to its business. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.