Should Weakness in Yulon Nissan Motor Co., Ltd's (TPE:2227) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at Yulon Nissan Motor's (TPE:2227) recent performance, when its stock has declined 3.6% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Yulon Nissan Motor's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Yulon Nissan Motor

How Do You 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 Yulon Nissan Motor is:

32% = NT$6.0b ÷ NT$19b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.32 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. 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.

A Side By Side comparison of Yulon Nissan Motor's Earnings Growth And 32% ROE

To begin with, Yulon Nissan Motor has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 6.5% also doesn't go unnoticed by us. This probably laid the groundwork for Yulon Nissan Motor's moderate 7.2% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Yulon Nissan Motor compares quite favourably to the industry average, which shows a decline of 4.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Yulon Nissan Motor's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Yulon Nissan Motor Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 100% (or a retention ratio of 0.3%) for Yulon Nissan Motor suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Yulon Nissan Motor 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.

Conclusion

On the whole, we do feel that Yulon Nissan Motor has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Yulon Nissan Motor's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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