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) has had a great run on the share market with its stock up by a significant 6.9% over the last week. 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 X-FAB Silicon Foundries' 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. 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 return on equity 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:

2.9% = US$30m ÷ US$1.0b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.03 in profit.

View our latest analysis for X-FAB Silicon Foundries

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. 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 2.9% ROE

It is quite clear that X-FAB Silicon Foundries' ROE is rather low. Not just that, even compared to the industry average of 4.9%, the company's ROE is entirely unremarkable. Despite this, surprisingly, X-FAB Silicon Foundries saw an exceptional 25% net income growth over the past five years. We believe that there might be 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.

As a next step, we compared X-FAB Silicon Foundries' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 25% in the same period.

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. Is X-FAB Silicon Foundries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is X-FAB Silicon Foundries Efficiently Re-investing Its Profits?

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.

Conclusion

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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.