Patec Precision Industry Co., Ltd.'s (TWSE:2236) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Patec Precision Industry's (TWSE:2236) stock is up by a considerable 13% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Patec Precision Industry'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Patec Precision Industry

How To 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 Patec Precision Industry is:

8.0% = NT$127m ÷ NT$1.6b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.08.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Patec Precision Industry's Earnings Growth And 8.0% ROE

When you first look at it, Patec Precision Industry's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.4%, so we won't completely dismiss the company. Having said that, Patec Precision Industry has shown a modest net income growth of 6.8% 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 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 Patec Precision Industry's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

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. Is Patec Precision Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Patec Precision Industry Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for Patec Precision Industry suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Patec Precision Industry has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we're a bit ambivalent about Patec Precision Industry's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Patec Precision Industry's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.