Hsin Yung Chien Co., Ltd.'s (TPE:2114) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Hsin Yung Chien's (TPE:2114) stock is up by 6.5% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Hsin Yung Chien'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Hsin Yung Chien

How Is ROE Calculated?

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 Hsin Yung Chien is:

17% = NT$380m ÷ NT$2.3b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.17.

What Has ROE Got To Do With 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. 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.

Hsin Yung Chien's Earnings Growth And 17% ROE

To begin with, Hsin Yung Chien seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.7%. However, we are curious as to how the high returns still resulted in flat growth for Hsin Yung Chien in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Hsin Yung Chien's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 1.2% in the same period, which is a bit concerning.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hsin Yung Chien fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hsin Yung Chien Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 87% (meaning, the company retains only 13% of profits) for Hsin Yung Chien suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Hsin Yung Chien has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Hsin Yung Chien has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. 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 Hsin Yung Chien'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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