Are Wuxi Taclink Optoelectronics Technology Co., Ltd.'s (SHSE:688205) Mixed Financials Driving The Negative Sentiment?

Wuxi Taclink Optoelectronics Technology (SHSE:688205) has had a rough three months with its share price down 17%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Wuxi Taclink Optoelectronics Technology's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Wuxi Taclink Optoelectronics Technology

How To Calculate Return On Equity?

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 Wuxi Taclink Optoelectronics Technology is:

4.2% = CN¥93m ÷ CN¥2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. 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 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 Taclink Optoelectronics Technology's Earnings Growth And 4.2% ROE

As you can see, Wuxi Taclink Optoelectronics Technology's ROE looks pretty weak. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. As a result, Wuxi Taclink Optoelectronics Technology's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Wuxi Taclink Optoelectronics Technology's net income growth with the industry and discovered that the industry saw an average growth of 6.4% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Wuxi Taclink Optoelectronics Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wuxi Taclink Optoelectronics Technology Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 45% (meaning the company retains55% of profits) in the last three-year period, Wuxi Taclink Optoelectronics Technology's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Wuxi Taclink Optoelectronics Technology only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Wuxi Taclink Optoelectronics Technology can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.