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 8.7% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Chung-Hsin Electric and Machinery Manufacturing's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

How Is ROE Calculated?

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 Chung-Hsin Electric and Machinery Manufacturing is:

19% = NT$3.6b ÷ NT$19b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.19 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. 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.

A Side By Side comparison of Chung-Hsin Electric and Machinery Manufacturing's Earnings Growth And 19% ROE

At first glance, Chung-Hsin Electric and Machinery Manufacturing seems to have a decent ROE. On comparing with the average industry ROE of 8.5% the company's ROE looks pretty remarkable. This probably laid the ground for Chung-Hsin Electric and Machinery Manufacturing's significant 22% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Chung-Hsin Electric and Machinery Manufacturing'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 11% in the same 5-year 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. 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 Making Efficient Use Of Its Profits?

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.

Moreover, Chung-Hsin Electric and Machinery Manufacturing is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 67%. Regardless, the future ROE for Chung-Hsin Electric and Machinery Manufacturing is predicted to rise to 27% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that Chung-Hsin Electric and Machinery Manufacturing'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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.