Shining Victory Motor Electronic Co., Ltd.'s (TWSE:2248) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Shining Victory Motor Electronic (TWSE:2248) has had a rough three months with its share price down 13%. 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. Specifically, we decided to study Shining Victory Motor Electronic's ROE in this article.

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.

See our latest analysis for Shining Victory Motor Electronic

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shining Victory Motor Electronic is:

25% = NT$288m ÷ NT$1.2b (Based on the trailing twelve months to September 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$0.25 in profit.

Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shining Victory Motor Electronic's Earnings Growth And 25% ROE

First thing first, we like that Shining Victory Motor Electronic has an impressive ROE. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. As a result, Shining Victory Motor Electronic's exceptional 49% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Shining Victory Motor Electronic's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 21% in the same 5-year 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shining Victory Motor Electronic's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shining Victory Motor Electronic Using Its Retained Earnings Effectively?

The three-year median payout ratio for Shining Victory Motor Electronic is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Shining Victory Motor Electronic is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Shining Victory Motor Electronic has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Shining Victory Motor Electronic's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Shining Victory Motor Electronic visit our risks dashboard for free.

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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.