Do Its Financials Have Any Role To Play In Driving Wuxi Holyview Microelectronics Co.,Ltd.'s (SHSE:603375) Stock Up Recently?

Wuxi Holyview MicroelectronicsLtd (SHSE:603375) has had a great run on the share market with its stock up by a significant 20% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Wuxi Holyview MicroelectronicsLtd's ROE today.

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.

Check out our latest analysis for Wuxi Holyview MicroelectronicsLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Wuxi Holyview MicroelectronicsLtd is:

6.8% = CN¥105m ÷ CN¥1.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Wuxi Holyview MicroelectronicsLtd's Earnings Growth And 6.8% ROE

On the face of it, Wuxi Holyview MicroelectronicsLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Moreover, we are quite pleased to see that Wuxi Holyview MicroelectronicsLtd's net income grew significantly at a rate of 27% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. 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.

Next, on comparing with the industry net income growth, we found that Wuxi Holyview MicroelectronicsLtd's growth is quite high when compared to the industry average growth of 4.7% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Wuxi Holyview MicroelectronicsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wuxi Holyview MicroelectronicsLtd Using Its Retained Earnings Effectively?

Wuxi Holyview MicroelectronicsLtd has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Wuxi Holyview MicroelectronicsLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Conclusion

On the whole, we do feel that Wuxi Holyview MicroelectronicsLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Wuxi Holyview MicroelectronicsLtd visit our risks dashboard for free.

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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.