Is Suzhou TFC Optical Communication Co., Ltd.'s (SZSE:300394) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Suzhou TFC Optical Communication's (SZSE:300394) stock increased significantly by 36% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Suzhou TFC Optical Communication's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Suzhou TFC Optical Communication

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Suzhou TFC Optical Communication is:

33% = CN¥1.3b ÷ CN¥3.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.33.

Why Is ROE Important For 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.

Suzhou TFC Optical Communication's Earnings Growth And 33% ROE

To begin with, Suzhou TFC Optical Communication has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 5.6% also doesn't go unnoticed by us. Under the circumstances, Suzhou TFC Optical Communication's considerable five year net income growth of 38% was to be expected.

As a next step, we compared Suzhou TFC Optical Communication's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for 300394? You can find out in our latest intrinsic value infographic research report.

Is Suzhou TFC Optical Communication Using Its Retained Earnings Effectively?

The three-year median payout ratio for Suzhou TFC Optical Communication is 48%, which is moderately low. The company is retaining the remaining 52%. So it seems that Suzhou TFC Optical Communication is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Suzhou TFC Optical Communication has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 53% of its profits over the next three years. Still, forecasts suggest that Suzhou TFC Optical Communication's future ROE will rise to 40% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Suzhou TFC Optical Communication's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.