Declining Stock and Solid Fundamentals: Is The Market Wrong About Shanghai Fudan Microelectronics Group Company Limited (HKG:1385)?

With its stock down 34% over the past three months, it is easy to disregard Shanghai Fudan Microelectronics Group (HKG:1385). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Shanghai Fudan Microelectronics Group

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 Shanghai Fudan Microelectronics Group is:

20% = CN¥1.1b ÷ CN¥5.4b (Based on the trailing twelve months to March 2023).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.20.

What Has ROE Got To Do With 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 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.

A Side By Side comparison of Shanghai Fudan Microelectronics Group's Earnings Growth And 20% ROE

To start with, Shanghai Fudan Microelectronics Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Shanghai Fudan Microelectronics Group's significant 58% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

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 25% in the same 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 Shanghai Fudan Microelectronics Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Fudan Microelectronics Group Using Its Retained Earnings Effectively?

Shanghai Fudan Microelectronics Group's ' three-year median payout ratio is on the lower side at 8.5% implying that it is retaining a higher percentage (92%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Shanghai Fudan Microelectronics Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 9.6%. Accordingly, forecasts suggest that Shanghai Fudan Microelectronics Group's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Shanghai Fudan Microelectronics Group'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.