With its stock down 11% over the past month, it is easy to disregard Tangshan Sunfar Silicon IndustriesLtd (SHSE:603938). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Tangshan Sunfar Silicon IndustriesLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Tangshan Sunfar Silicon IndustriesLtd is:

3.6% = CN¥88m ÷ CN¥2.4b (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¥0.04.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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 Tangshan Sunfar Silicon IndustriesLtd's Earnings Growth And 3.6% ROE

It is hard to argue that Tangshan Sunfar Silicon IndustriesLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Despite this, surprisingly, Tangshan Sunfar Silicon IndustriesLtd saw an exceptional 31% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Tangshan Sunfar Silicon IndustriesLtd'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 7.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. Is Tangshan Sunfar Silicon IndustriesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tangshan Sunfar Silicon IndustriesLtd Making Efficient Use Of Its Profits?

Tangshan Sunfar Silicon IndustriesLtd has a really low three-year median payout ratio of 10.0%, meaning that it has the remaining 90% left over to reinvest into its business. So it looks like Tangshan Sunfar Silicon IndustriesLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Tangshan Sunfar Silicon IndustriesLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

On the whole, we do feel that Tangshan Sunfar Silicon IndustriesLtd has some positive attributes. 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Tangshan Sunfar Silicon IndustriesLtd visit our risks dashboard for free.

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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.

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