Are Robust Financials Driving The Recent Rally In Circuit Fabology Microelectronics Equipment Co.,Ltd.'s (SHSE:688630) Stock?

Circuit Fabology Microelectronics EquipmentLtd's (SHSE:688630) stock is up by a considerable 23% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Circuit Fabology Microelectronics EquipmentLtd's ROE in this article.

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

See our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Circuit Fabology Microelectronics EquipmentLtd is:

10% = CN¥216m ÷ CN¥2.1b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Circuit Fabology Microelectronics EquipmentLtd's Earnings Growth And 10% ROE

At first glance, Circuit Fabology Microelectronics EquipmentLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Especially when you consider Circuit Fabology Microelectronics EquipmentLtd's exceptional 26% 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. E.g the company has a low payout ratio or could belong to a high growth industry.

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

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Circuit Fabology Microelectronics EquipmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Circuit Fabology Microelectronics EquipmentLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Circuit Fabology Microelectronics EquipmentLtd is 34%, which is moderately low. The company is retaining the remaining 66%. So it seems that Circuit Fabology Microelectronics EquipmentLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Circuit Fabology Microelectronics EquipmentLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 39%. However, Circuit Fabology Microelectronics EquipmentLtd's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Circuit Fabology Microelectronics EquipmentLtd'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. 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.