It is hard to get excited after looking at Suzhou TFC Optical Communication's (SZSE:300394) recent performance, when its stock has declined 10% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Suzhou TFC Optical Communication's ROE in this article.
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 Is ROE Calculated?
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 Suzhou TFC Optical Communication is:
25% = CN¥918m ÷ CN¥3.7b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.25.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Suzhou TFC Optical Communication's Earnings Growth And 25% ROE
First thing first, we like that Suzhou TFC Optical Communication has an impressive ROE. Secondly, even when compared to the industry average of 6.4% the company's ROE is quite impressive. So, the substantial 32% net income growth seen by Suzhou TFC Optical Communication over the past five years isn't overly surprising.
As a next step, we compared Suzhou TFC Optical Communication'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 13%.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 300394 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Suzhou TFC Optical Communication Making Efficient Use Of Its Profits?
The three-year median payout ratio for Suzhou TFC Optical Communication is 45%, which is moderately low. The company is retaining the remaining 55%. By the looks of it, the dividend is well covered and Suzhou TFC Optical Communication is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Suzhou TFC Optical Communication has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 48% of its profits over the next three years. Regardless, the future ROE for Suzhou TFC Optical Communication is predicted to rise to 39% despite there being not much change expected in its payout ratio.
Conclusion
In total, we are pretty happy with Suzhou TFC Optical Communication's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
