Are Strong Financial Prospects The Force That Is Driving The Momentum In Hong-Wei Electrical Industry & Co., Ltd.'s GTSM:4565) Stock?

Hong-Wei Electrical Industry (GTSM:4565) has had a great run on the share market with its stock up by a significant 16% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Hong-Wei Electrical Industry'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Hong-Wei Electrical Industry

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hong-Wei Electrical Industry is:

22% = NT$209m ÷ NT$969m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.22 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Hong-Wei Electrical Industry's Earnings Growth And 22% ROE

First thing first, we like that Hong-Wei Electrical Industry has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.8% also doesn't go unnoticed by us. This probably laid the groundwork for Hong-Wei Electrical Industry's moderate 16% net income growth seen over the past five years.

As a next step, we compared Hong-Wei Electrical Industry's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.2%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hong-Wei Electrical Industry's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hong-Wei Electrical Industry Making Efficient Use Of Its Profits?

Hong-Wei Electrical Industry has a significant three-year median payout ratio of 65%, meaning that it is left with only 35% 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.

Besides, Hong-Wei Electrical Industry has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Hong-Wei Electrical Industry's performance. 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. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Hong-Wei Electrical Industry'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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