Could The Market Be Wrong About Chung-Hsin Electric and Machinery Manufacturing Corp. (TWSE:1513) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Chung-Hsin Electric and Machinery Manufacturing's (TWSE:1513) recent performance, when its stock has declined 9.4% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Chung-Hsin Electric and Machinery Manufacturing'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Chung-Hsin Electric and Machinery Manufacturing

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 Chung-Hsin Electric and Machinery Manufacturing is:

19% = NT$3.4b ÷ NT$18b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.19 in profit.

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.

Chung-Hsin Electric and Machinery Manufacturing's Earnings Growth And 19% ROE

To begin with, Chung-Hsin Electric and Machinery Manufacturing seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.0%. Probably as a result of this, Chung-Hsin Electric and Machinery Manufacturing was able to see an impressive net income growth of 22% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Chung-Hsin Electric and Machinery Manufacturing's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is 1513 worth today? The intrinsic value infographic in our free research report helps visualize whether 1513 is currently mispriced by the market.

Is Chung-Hsin Electric and Machinery Manufacturing Using Its Retained Earnings Effectively?

Chung-Hsin Electric and Machinery Manufacturing has a significant three-year median payout ratio of 67%, meaning the company only retains 33% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Chung-Hsin Electric and Machinery Manufacturing 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 64% of its profits over the next three years. Still, forecasts suggest that Chung-Hsin Electric and Machinery Manufacturing's future ROE will rise to 25% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Chung-Hsin Electric and Machinery Manufacturing'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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.