X-FAB Silicon Foundries SE's (EPA:XFAB) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

X-FAB Silicon Foundries' (EPA:XFAB) stock is up by a considerable 59% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on X-FAB Silicon Foundries' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 X-FAB Silicon Foundries is:

4.9% = US$51m ÷ US$1.0b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.05 in profit.

View our latest analysis for X-FAB Silicon Foundries

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

X-FAB Silicon Foundries' Earnings Growth And 4.9% ROE

At first glance, X-FAB Silicon Foundries' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.8%. Moreover, we are quite pleased to see that X-FAB Silicon Foundries' net income grew significantly at a rate of 35% 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 instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing X-FAB Silicon Foundries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 35% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about X-FAB Silicon Foundries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is X-FAB Silicon Foundries Using Its Retained Earnings Effectively?

Given that X-FAB Silicon Foundries doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we feel that X-FAB Silicon Foundries certainly does have some positive factors to consider. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.