Most readers would already be aware that Tangshan Sunfar Silicon IndustriesLtd's (SHSE:603938) stock increased significantly by 18% over the past three months. 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. In this article, we decided to focus on Tangshan Sunfar Silicon IndustriesLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To Calculate Return On Equity?

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 Tangshan Sunfar Silicon IndustriesLtd is:

2.7% = CN¥65m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Tangshan Sunfar Silicon IndustriesLtd's Earnings Growth And 2.7% ROE

It is hard to argue that Tangshan Sunfar Silicon IndustriesLtd's ROE is much good in and of itself. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. Although, we can see that Tangshan Sunfar Silicon IndustriesLtd saw a modest net income growth of 15% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Tangshan Sunfar Silicon IndustriesLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.9%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Tangshan Sunfar Silicon IndustriesLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tangshan Sunfar Silicon IndustriesLtd Efficiently Re-investing Its Profits?

Tangshan Sunfar Silicon IndustriesLtd's three-year median payout ratio to shareholders is 10% (implying that it retains 90% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Tangshan Sunfar Silicon IndustriesLtd has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Tangshan Sunfar Silicon IndustriesLtd 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. 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. You can see the 1 risk we have identified for Tangshan Sunfar Silicon IndustriesLtd by visiting our risks dashboard for free on our platform here.

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.