Anji Microelectronics Technology (Shanghai) (SHSE:688019) has had a great run on the share market with its stock up by a significant 14% over the last 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. In this article, we decided to focus on Anji Microelectronics Technology (Shanghai)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Anji Microelectronics Technology (Shanghai) is:

19% = CN¥432m ÷ CN¥2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.19 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. 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.

Anji Microelectronics Technology (Shanghai)'s Earnings Growth And 19% ROE

To start with, Anji Microelectronics Technology (Shanghai)'s ROE looks acceptable. Especially when compared to the industry average of 5.8% the company's ROE looks pretty impressive. Probably as a result of this, Anji Microelectronics Technology (Shanghai) was able to see an impressive net income growth of 40% over the last five years. We reckon that there could also be other factors at play here. 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.

We then compared Anji Microelectronics Technology (Shanghai)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Anji Microelectronics Technology (Shanghai)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anji Microelectronics Technology (Shanghai) Using Its Retained Earnings Effectively?

Anji Microelectronics Technology (Shanghai)'s three-year median payout ratio to shareholders is 9.3%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Anji Microelectronics Technology (Shanghai) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Anji Microelectronics Technology (Shanghai) has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 8.3%. As a result, Anji Microelectronics Technology (Shanghai)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Conclusion

In total, we are pretty happy with Anji Microelectronics Technology (Shanghai)'s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.