Xi'an Peri Power Semiconductor Converting Technology Co.,Ltd. (SZSE:300831) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Xi'an Peri Power Semiconductor Converting TechnologyLtd (SZSE:300831) has had a great run on the share market with its stock up by a significant 69% over the last three months. 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 Xi'an Peri Power Semiconductor Converting TechnologyLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Xi'an Peri Power Semiconductor Converting TechnologyLtd

How Is ROE Calculated?

Return on equity 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 Xi'an Peri Power Semiconductor Converting TechnologyLtd is:

6.8% = CN¥61m ÷ CN¥908m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Xi'an Peri Power Semiconductor Converting TechnologyLtd's Earnings Growth And 6.8% ROE

On the face of it, Xi'an Peri Power Semiconductor Converting TechnologyLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 5.8%, we may spare it some thought. Having said that, Xi'an Peri Power Semiconductor Converting TechnologyLtd's five year net income decline rate was 7.9%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

However, when we compared Xi'an Peri Power Semiconductor Converting TechnologyLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. Is Xi'an Peri Power Semiconductor Converting TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xi'an Peri Power Semiconductor Converting TechnologyLtd Making Efficient Use Of Its Profits?

Xi'an Peri Power Semiconductor Converting TechnologyLtd's low three-year median payout ratio of 17% (or a retention ratio of 83%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Xi'an Peri Power Semiconductor Converting TechnologyLtd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we have mixed feelings about Xi'an Peri Power Semiconductor Converting TechnologyLtd. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. You can see the 2 risks we have identified for Xi'an Peri Power Semiconductor Converting TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.