Is Hefei I-TEK OptoElectronics Co., Ltd.'s (SHSE:688610) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Hefei I-TEK OptoElectronics' (SHSE:688610) stock increased significantly by 54% over the past three months. 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. Specifically, we decided to study Hefei I-TEK OptoElectronics' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Hefei I-TEK OptoElectronics

How Do You Calculate Return On Equity?

ROE 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 Hefei I-TEK OptoElectronics is:

1.7% = CN¥25m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Hefei I-TEK OptoElectronics' Earnings Growth And 1.7% ROE

It is quite clear that Hefei I-TEK OptoElectronics' ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Hefei I-TEK OptoElectronics was still able to see a decent net income growth of 16% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Hefei I-TEK OptoElectronics' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.9% in the same 5-year 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). This then helps them determine if the stock is placed for a bright or bleak future. Is Hefei I-TEK OptoElectronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hefei I-TEK OptoElectronics Making Efficient Use Of Its Profits?

Hefei I-TEK OptoElectronics has a significant three-year median payout ratio of 57%, meaning that it is left with only 43% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Along with seeing a growth in earnings, Hefei I-TEK OptoElectronics only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like Hefei I-TEK OptoElectronics has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we've only made a short study of the company's growth data. You can do your own research on Hefei I-TEK OptoElectronics and see how it has performed in the past by looking at this FREE detailed graph 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.