Are Robust Financials Driving The Recent Rally In Unigroup Guoxin Microelectronics Co., Ltd.'s (SZSE:002049) Stock?

Unigroup Guoxin Microelectronics (SZSE:002049) has had a great run on the share market with its stock up by a significant 23% over the last week. 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 Unigroup Guoxin Microelectronics' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Unigroup Guoxin Microelectronics

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 Unigroup Guoxin Microelectronics is:

16% = CN¥1.9b ÷ CN¥12b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 in profit.

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. 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.

A Side By Side comparison of Unigroup Guoxin Microelectronics' Earnings Growth And 16% ROE

At first glance, Unigroup Guoxin Microelectronics seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.9%. This probably laid the ground for Unigroup Guoxin Microelectronics' significant 32% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

We then compared Unigroup Guoxin Microelectronics' 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 17% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Unigroup Guoxin Microelectronics is trading on a high P/E or a low P/E, relative to its industry.

Is Unigroup Guoxin Microelectronics Efficiently Re-investing Its Profits?

Unigroup Guoxin Microelectronics has a really low three-year median payout ratio of 9.1%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Unigroup Guoxin Microelectronics is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Unigroup Guoxin Microelectronics is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 22% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Unigroup Guoxin Microelectronics' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.