Do Its Financials Have Any Role To Play In Driving Hold-Key Electric Wire & Cable Co., Ltd's (TWSE:1618) Stock Up Recently?

Hold-Key Electric Wire & Cable's (TWSE:1618) stock is up by a considerable 56% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Hold-Key Electric Wire & Cable's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Hold-Key Electric Wire & Cable

How Is ROE Calculated?

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 Hold-Key Electric Wire & Cable is:

8.3% = NT$452m ÷ NT$5.4b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.08 in profit.

Why Is ROE Important For 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.

Hold-Key Electric Wire & Cable's Earnings Growth And 8.3% ROE

At first glance, Hold-Key Electric Wire & Cable's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.9%, we may spare it some thought. Looking at Hold-Key Electric Wire & Cable's exceptional 34% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Hold-Key Electric Wire & Cable's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Hold-Key Electric Wire & Cable is trading on a high P/E or a low P/E, relative to its industry.

Is Hold-Key Electric Wire & Cable Using Its Retained Earnings Effectively?

Hold-Key Electric Wire & Cable's three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hold-Key Electric Wire & Cable is reinvesting its earnings efficiently.

Moreover, Hold-Key Electric Wire & Cable 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.

Conclusion

Overall, we feel that Hold-Key Electric Wire & Cable 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. You can see the 1 risk we have identified for Hold-Key Electric Wire & Cable by visiting our risks dashboard for free on our platform here.

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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.