Are Robust Financials Driving The Recent Rally In Shanghai Fudan Microelectronics Group Company Limited's (HKG:1385) Stock?

Shanghai Fudan Microelectronics Group (HKG:1385) has had a great run on the share market with its stock up by a significant 8.0% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Shanghai Fudan Microelectronics Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 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 Shanghai Fudan Microelectronics Group is:

7.9% = CN¥530m ÷ CN¥6.7b (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.08.

Check out our latest analysis for Shanghai Fudan Microelectronics Group

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shanghai Fudan Microelectronics Group's Earnings Growth And 7.9% ROE

At first glance, Shanghai Fudan Microelectronics Group's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 4.1%, is definitely interesting. Especially when you consider Shanghai Fudan Microelectronics Group's exceptional 26% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Shanghai Fudan Microelectronics Group's 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 4.2% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shanghai Fudan Microelectronics Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Fudan Microelectronics Group Using Its Retained Earnings Effectively?

Shanghai Fudan Microelectronics Group has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Shanghai Fudan Microelectronics Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Shanghai Fudan Microelectronics Group has been paying dividends over a period of three years. 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 9.4% of its profits over the next three years. However, Shanghai Fudan Microelectronics Group's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Shanghai Fudan Microelectronics Group's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.