Do Its Financials Have Any Role To Play In Driving T&S Communications Co.,Ltd.'s (SZSE:300570) Stock Up Recently?

Most readers would already be aware that T&S CommunicationsLtd's (SZSE:300570) stock increased significantly by 52% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on T&S CommunicationsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for T&S CommunicationsLtd

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 T&S CommunicationsLtd is:

14% = CN¥198m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.14.

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. 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.

T&S CommunicationsLtd's Earnings Growth And 14% ROE

At first glance, T&S CommunicationsLtd seems to have a decent ROE. On comparing with the average industry ROE of 5.6% the company's ROE looks pretty remarkable. Probably as a result of this, T&S CommunicationsLtd was able to see a decent growth of 8.3% over the last five years.

As a next step, we compared T&S CommunicationsLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if T&S CommunicationsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is T&S CommunicationsLtd Using Its Retained Earnings Effectively?

While T&S CommunicationsLtd has a three-year median payout ratio of 71% (which means it retains 29% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, T&S CommunicationsLtd has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that T&S CommunicationsLtd has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.