Are Robust Financials Driving The Recent Rally In Foxsemicon Integrated Technology Inc.'s (TPE:3413) Stock?

Foxsemicon Integrated Technology (TPE:3413) has had a great run on the share market with its stock up by a significant 22% over the last 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 Foxsemicon Integrated Technology'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.

See our latest analysis for Foxsemicon Integrated Technology

How Is ROE Calculated?

Return on equity 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 Foxsemicon Integrated Technology is:

25% = NT$1.2b ÷ NT$5.0b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.25 in profit.

What Is The Relationship Between ROE And 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. 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 Foxsemicon Integrated Technology's Earnings Growth And 25% ROE

First thing first, we like that Foxsemicon Integrated Technology has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Probably as a result of this, Foxsemicon Integrated Technology was able to see a decent net income growth of 12% over the last five years.

As a next step, we compared Foxsemicon Integrated Technology'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 8.9%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Foxsemicon Integrated Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Foxsemicon Integrated Technology Using Its Retained Earnings Effectively?

Foxsemicon Integrated Technology has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Foxsemicon Integrated Technology has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Foxsemicon Integrated Technology's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.

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This article by Simply Wall St is general in nature. 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.
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