Most readers would already be aware that Wuxi Taclink Optoelectronics Technology's (SHSE:688205) stock increased significantly by 129% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Wuxi Taclink Optoelectronics Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Wuxi Taclink Optoelectronics Technology is:

4.6% = CN¥102m ÷ CN¥2.2b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

Why Is ROE Important For 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. 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 Wuxi Taclink Optoelectronics Technology's Earnings Growth And 4.6% ROE

It is hard to argue that Wuxi Taclink Optoelectronics Technology's ROE is much good in and of itself. Not just that, even compared to the industry average of 6.3%, the company's ROE is entirely unremarkable. Therefore, Wuxi Taclink Optoelectronics Technology's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Wuxi Taclink Optoelectronics Technology's net income growth with the industry and discovered that the industry saw an average growth of 3.9% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 688205? You can find out in our latest intrinsic value infographic research report

Is Wuxi Taclink Optoelectronics Technology Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for Wuxi Taclink Optoelectronics Technology suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Only recently, Wuxi Taclink Optoelectronics Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Wuxi Taclink Optoelectronics Technology. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.