Xi'an Peri Power Semiconductor Converting Technology Co.,Ltd.'s (SZSE:300831) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Xi'an Peri Power Semiconductor Converting TechnologyLtd's (SZSE:300831) stock is up by a considerable 35% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Xi'an Peri Power Semiconductor Converting TechnologyLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

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 Xi'an Peri Power Semiconductor Converting TechnologyLtd is:

3.2% = CN¥28m ÷ CN¥872m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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¥0.03 in profit.

Why Is ROE Important For 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Xi'an Peri Power Semiconductor Converting TechnologyLtd's Earnings Growth And 3.2% ROE

It is quite clear that Xi'an Peri Power Semiconductor Converting TechnologyLtd's ROE is rather low. Not just that, even compared to the industry average of 5.7%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 8.8% seen by Xi'an Peri Power Semiconductor Converting TechnologyLtd was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Xi'an Peri Power Semiconductor Converting TechnologyLtd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a 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. 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. 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 Using Its Retained Earnings Effectively?

Xi'an Peri Power Semiconductor Converting TechnologyLtd's low three-year median payout ratio of 17% (implying that it retains the remaining 83% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, Xi'an Peri Power Semiconductor Converting TechnologyLtd has been paying dividends over a period of four years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we're a bit ambivalent about Xi'an Peri Power Semiconductor Converting TechnologyLtd's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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 will have the 1 risk we have identified for Xi'an Peri Power Semiconductor Converting TechnologyLtd.

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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.