Voltronic Power Technology Corp.'s (TPE:6409) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Voltronic Power Technology (TPE:6409) has had a great run on the share market with its stock up by a significant 22% over the last month. 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. Specifically, we decided to study Voltronic Power Technology's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Voltronic Power Technology

How Do You Calculate Return On Equity?

Return on equity 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 Voltronic Power Technology is:

47% = NT$2.3b ÷ NT$4.8b (Based on the trailing twelve months to September 2020).

The 'return' is the profit 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$0.47.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Voltronic Power Technology's Earnings Growth And 47% ROE

To begin with, Voltronic Power Technology has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 7.9% the company's ROE is quite impressive. Probably as a result of this, Voltronic Power Technology was able to see a decent net income growth of 12% over the last five years.

We then compared Voltronic Power Technology'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 3.7% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Voltronic Power Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Voltronic Power Technology Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 90% (or a retention ratio of 10%) for Voltronic Power Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Voltronic Power Technology has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its 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 75%. As a result, Voltronic Power Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 45% for future ROE.

Conclusion

On the whole, we feel that Voltronic Power Technology's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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