Chieftek Precision Co., Ltd.'s (TPE:1597) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Chieftek Precision's (TPE:1597) stock increased significantly by 20% over the past 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. In this article, we decided to focus on Chieftek Precision's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Chieftek Precision

How To 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 Chieftek Precision is:

9.2% = NT$189m ÷ NT$2.1b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.09.

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.

Chieftek Precision's Earnings Growth And 9.2% ROE

To start with, Chieftek Precision's ROE looks acceptable. Even when compared to the industry average of 9.7% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 21% seen over the past five years by Chieftek Precision. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Chieftek Precision'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 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Chieftek Precision is trading on a high P/E or a low P/E, relative to its industry.

Is Chieftek Precision Making Efficient Use Of Its Profits?

Chieftek Precision's three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company is retaining 75% of its profits. So it looks like Chieftek Precision is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Chieftek Precision has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Chieftek Precision's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Chieftek Precision.

If you decide to trade Chieftek Precision, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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