Chainqui Construction Development Co.,Ltd's (TPE:2509) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Chainqui Construction DevelopmentLtd (TPE:2509) has had a great run on the share market with its stock up by a significant 5.8% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Chainqui Construction DevelopmentLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Chainqui Construction DevelopmentLtd

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 Chainqui Construction DevelopmentLtd is:

2.6% = NT$124m ÷ NT$4.7b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.03 in profit.

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.

A Side By Side comparison of Chainqui Construction DevelopmentLtd's Earnings Growth And 2.6% ROE

It is hard to argue that Chainqui Construction DevelopmentLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 9.4%, the company's ROE is entirely unremarkable. Chainqui Construction DevelopmentLtd was still able to see a decent net income growth of 16% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Chainqui Construction DevelopmentLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Chainqui Construction DevelopmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Chainqui Construction DevelopmentLtd Efficiently Re-investing Its Profits?

Chainqui Construction DevelopmentLtd's three-year median payout ratio to shareholders is 7.9% (implying that it retains 92% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Chainqui Construction DevelopmentLtd 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.

Conclusion

In total, it does look like Chainqui Construction DevelopmentLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Chainqui Construction DevelopmentLtd visit our risks dashboard for free.

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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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