Tong Ming Enterprise Co., Ltd.'s (TPE:5538) Stock Has Fared Decently: Is the Market Following Strong Financials?

Most readers would already know that Tong Ming Enterprise's (TPE:5538) stock increased by 6.7% over the past 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 Tong Ming Enterprise's ROE today.

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 Tong Ming Enterprise

How Do You Calculate Return On Equity?

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 Tong Ming Enterprise is:

12% = NT$459m ÷ NT$3.9b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.12 in profit.

What Is The Relationship Between ROE And 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 Tong Ming Enterprise's Earnings Growth And 12% ROE

At first glance, Tong Ming Enterprise seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.9%. This probably goes some way in explaining Tong Ming Enterprise's moderate 7.0% growth over the past five years amongst other factors.

We then compared Tong Ming Enterprise's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.2% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Tong Ming Enterprise fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tong Ming Enterprise Making Efficient Use Of Its Profits?

While Tong Ming Enterprise has a three-year median payout ratio of 61% (which means it retains 39% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Tong Ming Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

On the whole, we feel that Tong Ming Enterprise's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. To gain further insights into Tong Ming Enterprise's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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