With its stock down 17% over the past three months, it is easy to disregard Wuxi Taclink Optoelectronics Technology (SHSE:688205). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Wuxi Taclink Optoelectronics Technology's ROE.

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.

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 Wuxi Taclink Optoelectronics Technology is:

4.2% = CN¥93m ÷ CN¥2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Wuxi Taclink Optoelectronics Technology's Earnings Growth And 4.2% ROE

It is quite clear that Wuxi Taclink Optoelectronics Technology's ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Hence, the flat earnings seen by Wuxi Taclink Optoelectronics Technology over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Wuxi Taclink Optoelectronics Technology's net income growth with the industry and discovered that the industry saw an average growth of 6.4% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Wuxi Taclink Optoelectronics Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wuxi Taclink Optoelectronics Technology Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 45% (or a retention ratio of 55%), Wuxi Taclink Optoelectronics Technology hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Only recently, Wuxi Taclink Optoelectronics Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Wuxi Taclink Optoelectronics Technology can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Wuxi Taclink Optoelectronics Technology 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. 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.