Declining Stock and Solid Fundamentals: Is The Market Wrong About Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630)?

Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) has had a rough week with its share price down 10%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Circuit Fabology Microelectronics EquipmentLtd's 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 Circuit Fabology Microelectronics EquipmentLtd

How Do You 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:

9.1% = CN¥186m ÷ CN¥2.0b (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¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Circuit Fabology Microelectronics EquipmentLtd's Earnings Growth And 9.1% ROE

When you first look at it, Circuit Fabology Microelectronics EquipmentLtd's ROE doesn't look that attractive. 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 Circuit Fabology Microelectronics EquipmentLtd's exceptional 26% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. 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.

We then compared Circuit Fabology Microelectronics EquipmentLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 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 Efficiently Re-investing Its Profits?

Circuit Fabology Microelectronics EquipmentLtd's three-year median payout ratio to shareholders is 21%, which is quite low. This implies that the company is retaining 79% of its profits. So it looks like Circuit Fabology Microelectronics EquipmentLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Circuit Fabology Microelectronics EquipmentLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 30% over the next three years. However, Circuit Fabology Microelectronics EquipmentLtd's future ROE is expected to rise to 16% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we are quite pleased with Circuit Fabology Microelectronics EquipmentLtd's 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.

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