Are Strong Financial Prospects The Force That Is Driving The Momentum In United Integrated Services Co., Ltd.'s TPE:2404) Stock?

United Integrated Services (TPE:2404) has had a great run on the share market with its stock up by a significant 11% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to United Integrated Services' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for United Integrated Services

How Is ROE Calculated?

ROE 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 United Integrated Services is:

43% = NT$4.0b ÷ NT$9.3b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.43.

What Has ROE Got To Do With 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.

United Integrated Services' Earnings Growth And 43% ROE

First thing first, we like that United Integrated Services has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.4% also doesn't go unnoticed by us. As a result, United Integrated Services' exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared United Integrated Services' 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 19%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 United Integrated Services is trading on a high P/E or a low P/E, relative to its industry.

Is United Integrated Services Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 87% (implying that it keeps only 13% of profits) for United Integrated Services suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, United Integrated Services 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 88%. Accordingly, forecasts suggest that United Integrated Services' future ROE will be 40% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with United Integrated Services' 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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