Do Its Financials Have Any Role To Play In Driving Chiu Ting Machinery Co., Ltd.'s (TWSE:1539) Stock Up Recently?

Most readers would already be aware that Chiu Ting Machinery's (TWSE:1539) stock increased significantly by 46% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Chiu Ting Machinery's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Chiu Ting Machinery

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Chiu Ting Machinery is:

6.7% = NT$108m ÷ NT$1.6b (Based on the trailing twelve months to June 2024).

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$0.07.

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. 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.

Chiu Ting Machinery's Earnings Growth And 6.7% ROE

When you first look at it, Chiu Ting Machinery's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. In spite of this, Chiu Ting Machinery was able to grow its net income considerably, at a rate of 26% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Chiu Ting Machinery'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.

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Chiu Ting Machinery is trading on a high P/E or a low P/E, relative to its industry.

Is Chiu Ting Machinery Making Efficient Use Of Its Profits?

The three-year median payout ratio for Chiu Ting Machinery is 42%, which is moderately low. The company is retaining the remaining 58%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Chiu Ting Machinery is reinvesting its earnings efficiently.

Moreover, Chiu Ting Machinery is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we feel that Chiu Ting Machinery certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Chiu Ting Machinery.

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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.