Young Fast Optoelectronics Co., Ltd.'s (TWSE:3622) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Young Fast Optoelectronics' (TWSE:3622) stock increased significantly by 22% over the past three months. 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. Specifically, we decided to study Young Fast Optoelectronics' ROE in this article.

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 Young Fast Optoelectronics

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 Young Fast Optoelectronics is:

9.2% = NT$610m ÷ NT$6.6b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.09.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Young Fast Optoelectronics' Earnings Growth And 9.2% ROE

At first glance, Young Fast Optoelectronics seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 8.0%. This probably goes some way in explaining Young Fast Optoelectronics' significant 32% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Young Fast Optoelectronics' growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Young Fast Optoelectronics is trading on a high P/E or a low P/E, relative to its industry.

Is Young Fast Optoelectronics Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 57% (implying that it keeps only 43% of profits) for Young Fast Optoelectronics suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Young Fast Optoelectronics has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Young Fast Optoelectronics' performance has been quite good. 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Young Fast Optoelectronics' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.