Can Mixed Fundamentals Have A Negative Impact on Changzhou Galaxy Century Microelectronics Co.,Ltd. (SHSE:688689) Current Share Price Momentum?

Most readers would already be aware that Changzhou Galaxy Century MicroelectronicsLtd's (SHSE:688689) stock increased significantly by 28% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Changzhou Galaxy Century MicroelectronicsLtd's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Changzhou Galaxy Century MicroelectronicsLtd

How To Calculate Return On Equity?

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 Changzhou Galaxy Century MicroelectronicsLtd is:

5.2% = CN¥68m ÷ CN¥1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

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. 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.

Changzhou Galaxy Century MicroelectronicsLtd's Earnings Growth And 5.2% ROE

On the face of it, Changzhou Galaxy Century MicroelectronicsLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.9%. Having said that, Changzhou Galaxy Century MicroelectronicsLtd's five year net income decline rate was 2.7%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Changzhou Galaxy Century MicroelectronicsLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 17% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Changzhou Galaxy Century MicroelectronicsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Changzhou Galaxy Century MicroelectronicsLtd Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 37% (where it is retaining 63% of its profits), Changzhou Galaxy Century MicroelectronicsLtd has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Additionally, Changzhou Galaxy Century MicroelectronicsLtd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, we're a bit ambivalent about Changzhou Galaxy Century MicroelectronicsLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Changzhou Galaxy Century MicroelectronicsLtd.

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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.