Wuxi Taclink Optoelectronics Technology Co., Ltd.'s (SHSE:688205) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Most readers would already be aware that Wuxi Taclink Optoelectronics Technology's (SHSE:688205) stock increased significantly by 106% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Wuxi Taclink Optoelectronics Technology'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.

View our latest analysis for Wuxi Taclink Optoelectronics Technology

How To 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 Wuxi Taclink Optoelectronics Technology is:

4.5% = CN¥99m ÷ CN¥2.2b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Wuxi Taclink Optoelectronics Technology's Earnings Growth And 4.5% ROE

As you can see, Wuxi Taclink Optoelectronics Technology's ROE looks pretty weak. Even compared to the average industry ROE of 6.4%, the company's ROE is quite dismal. 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 4.6% in the same period.

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. 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 Wuxi Taclink Optoelectronics Technology is trading on a high P/E or a low P/E, relative to its industry.

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

The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for Wuxi Taclink Optoelectronics Technology suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

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

Overall, we would be extremely cautious before making any decision on Wuxi Taclink Optoelectronics Technology. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Wuxi Taclink Optoelectronics Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.