Novatek Microelectronics Corp.'s (TWSE:3034) Stock Been Rising: Are Strong Financials Guiding The Market?

Novatek Microelectronics' (TWSE:3034) stock is up by 3.7% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Novatek Microelectronics' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Novatek Microelectronics

How To 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 Novatek Microelectronics is:

33% = NT$21b ÷ NT$63b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.33 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. 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.

Novatek Microelectronics' Earnings Growth And 33% ROE

Firstly, we acknowledge that Novatek Microelectronics has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 15% net income growth seen by Novatek Microelectronics over the past five years.

As a next step, we compared Novatek Microelectronics' 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 9.9%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 3034 worth today? The intrinsic value infographic in our free research report helps visualize whether 3034 is currently mispriced by the market.

Is Novatek Microelectronics Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 84% (or a retention ratio of 16%) for Novatek Microelectronics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Novatek Microelectronics has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 82%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 33%.

Conclusion

Overall, we are quite pleased with Novatek Microelectronics' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.