Is Allis Electric Co.,Ltd.'s (TWSE:1514) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Allis ElectricLtd's (TWSE:1514) stock increased significantly by 12% over the past week. 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. Particularly, we will be paying attention to Allis ElectricLtd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Allis ElectricLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Allis ElectricLtd is:

16% = NT$884m ÷ NT$5.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Allis ElectricLtd's Earnings Growth And 16% ROE

To start with, Allis ElectricLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.0%. Probably as a result of this, Allis ElectricLtd was able to see an impressive net income growth of 23% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Allis ElectricLtd's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Allis ElectricLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Allis ElectricLtd Making Efficient Use Of Its Profits?

Allis ElectricLtd's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. By the looks of it, the dividend is well covered and Allis ElectricLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Allis ElectricLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Allis ElectricLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.