Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Circuit Fabology Microelectronics EquipmentLtd's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You 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 Circuit Fabology Microelectronics EquipmentLtd is:

10% = CN¥216m ÷ CN¥2.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 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. 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 Circuit Fabology Microelectronics EquipmentLtd's Earnings Growth And 10% ROE

When you first look at it, Circuit Fabology Microelectronics EquipmentLtd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. Especially when you consider Circuit Fabology Microelectronics EquipmentLtd's exceptional 26% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Circuit Fabology Microelectronics EquipmentLtd's 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 14%.

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. Is Circuit Fabology Microelectronics EquipmentLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Circuit Fabology Microelectronics EquipmentLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Circuit Fabology Microelectronics EquipmentLtd is 34%, which is moderately low. The company is retaining the remaining 66%. By the looks of it, the dividend is well covered and Circuit Fabology Microelectronics EquipmentLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Circuit Fabology Microelectronics EquipmentLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 39% of its profits over the next three years. Still, forecasts suggest that Circuit Fabology Microelectronics EquipmentLtd's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with Circuit Fabology Microelectronics EquipmentLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.