Cheng Shin Rubber Ind. Co., Ltd.'s (TWSE:2105) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 4.5% over the past month, it is easy to disregard Cheng Shin Rubber Ind (TWSE:2105). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Cheng Shin Rubber Ind's ROE in this article.

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

Check out our latest analysis for Cheng Shin Rubber Ind

How Is ROE Calculated?

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 Cheng Shin Rubber Ind is:

9.4% = NT$8.1b ÷ NT$86b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.09 in profit.

Why Is ROE Important For 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. 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 Cheng Shin Rubber Ind's Earnings Growth And 9.4% ROE

To start with, Cheng Shin Rubber Ind's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.9%. 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 18% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Cheng Shin Rubber Ind is trading on a high P/E or a low P/E, relative to its industry.

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

Cheng Shin Rubber Ind has a significant three-year median payout ratio of 80%, meaning that it is left with only 20% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 90%. 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.

Summary

In total, we are pretty happy with Cheng Shin Rubber Ind's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.