With its stock down 46% over the past three months, it is easy to disregard Southchip Semiconductor Technology(Shanghai) (SHSE:688484). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Southchip Semiconductor Technology(Shanghai)'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Southchip Semiconductor Technology(Shanghai) is:

5.0% = CN¥180m ÷ CN¥3.6b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Southchip Semiconductor Technology(Shanghai)'s Earnings Growth And 5.0% ROE

On the face of it, Southchip Semiconductor Technology(Shanghai)'s ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. Moreover, we are quite pleased to see that Southchip Semiconductor Technology(Shanghai)'s net income grew significantly at a rate of 39% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. 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.

Next, on comparing with the industry net income growth, we found that Southchip Semiconductor Technology(Shanghai)'s growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Southchip Semiconductor Technology(Shanghai)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Southchip Semiconductor Technology(Shanghai) Efficiently Re-investing Its Profits?

Southchip Semiconductor Technology(Shanghai) has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. So it seems that Southchip Semiconductor Technology(Shanghai) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Summary

Overall, we feel that Southchip Semiconductor Technology(Shanghai) certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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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.