Most readers would already be aware that Southchip Semiconductor Technology(Shanghai)'s (SHSE:688484) stock increased significantly by 8.6% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Southchip Semiconductor Technology(Shanghai)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Southchip Semiconductor Technology(Shanghai)

How Is ROE Calculated?

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 Southchip Semiconductor Technology(Shanghai) is:

4.2% = CN¥144m ÷ CN¥3.5b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Is The Relationship Between ROE And 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.

Southchip Semiconductor Technology(Shanghai)'s Earnings Growth And 4.2% ROE

As you can see, Southchip Semiconductor Technology(Shanghai)'s ROE looks pretty weak. Even compared to the average industry ROE of 5.6%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Southchip Semiconductor Technology(Shanghai) grew its net income at a significant rate of 45% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Southchip Semiconductor 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 29% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Southchip Semiconductor Technology(Shanghai) is trading on a high P/E or a low P/E, relative to its industry.

Is Southchip Semiconductor Technology(Shanghai) Making Efficient Use Of Its Profits?

The three-year median payout ratio for Southchip Semiconductor Technology(Shanghai) is 45%, which is moderately low. The company is retaining the remaining 55%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Southchip Semiconductor Technology(Shanghai) is reinvesting its earnings efficiently.

Conclusion

In total, it does look like Southchip Semiconductor Technology(Shanghai) has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.