Do Its Financials Have Any Role To Play In Driving Phoenix Silicon International Corporation's (TPE:8028) Stock Up Recently?

Phoenix Silicon International (TPE:8028) has had a great run on the share market with its stock up by a significant 25% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Phoenix Silicon International'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Phoenix Silicon International

How Do You Calculate Return On Equity?

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 Phoenix Silicon International is:

5.9% = NT$134m ÷ NT$2.3b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Phoenix Silicon International's Earnings Growth And 5.9% ROE

On the face of it, Phoenix Silicon International's ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Phoenix Silicon International saw a modest net income growth of 7.7% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Phoenix Silicon International's 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 8.9% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Phoenix Silicon International's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Phoenix Silicon International Making Efficient Use Of Its Profits?

While Phoenix Silicon International has a three-year median payout ratio of 89% (which means it retains 11% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

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

Summary

Overall, we feel that Phoenix Silicon International certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Phoenix Silicon International and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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