Cheng Shin Rubber Ind. Co., Ltd. (TWSE:2105) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Cheng Shin Rubber Ind's (TWSE:2105) recent performance, when its stock has declined 7.2% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Cheng Shin Rubber Ind's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Cheng Shin Rubber Ind

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 Cheng Shin Rubber Ind is:

9.5% = NT$7.8b ÷ NT$83b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Cheng Shin Rubber Ind's Earnings Growth And 9.5% ROE

At first glance, Cheng Shin Rubber Ind seems to have a decent ROE. Even when compared to the industry average of 9.5% the company's ROE looks quite decent. This probably goes some way in explaining Cheng Shin Rubber Ind's moderate 16% growth over the past five years amongst other factors.

Next, on comparing Cheng Shin Rubber Ind's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is 2105 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Cheng Shin Rubber Ind Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Cheng Shin Rubber Ind suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Cheng Shin Rubber Ind has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 91% of its profits over the next three years. Regardless, the future ROE for Cheng Shin Rubber Ind is predicted to rise to 11% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that Cheng Shin Rubber Ind's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com