Tongfu MicroelectronicsLtd's (SZSE:002156) stock is up by a considerable 54% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Tongfu MicroelectronicsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

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 Tongfu MicroelectronicsLtd is:

5.9% = CN¥907m ÷ CN¥15b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 in profit.

What Has ROE Got To Do With 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. 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.

Tongfu MicroelectronicsLtd's Earnings Growth And 5.9% ROE

When you first look at it, Tongfu MicroelectronicsLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Having said that, Tongfu MicroelectronicsLtd has shown a modest net income growth of 12% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Tongfu MicroelectronicsLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Tongfu MicroelectronicsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tongfu MicroelectronicsLtd Making Efficient Use Of Its Profits?

In Tongfu MicroelectronicsLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.4% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Tongfu MicroelectronicsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, it does look like Tongfu MicroelectronicsLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.