Do Its Financials Have Any Role To Play In Driving Sunspring Metal Corporation's (TWSE:2062) Stock Up Recently?

Most readers would already be aware that Sunspring Metal's (TWSE:2062) stock increased significantly by 22% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Sunspring Metal's ROE today.

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 Sunspring Metal

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 Sunspring Metal is:

7.9% = NT$613m ÷ NT$7.8b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.08 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. 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 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.

Sunspring Metal's Earnings Growth And 7.9% ROE

When you first look at it, Sunspring Metal's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.5%. Particularly, the exceptional 39% net income growth seen by Sunspring Metal over the past five years is pretty remarkable. 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.

Next, on comparing with the industry net income growth, we found that Sunspring Metal's growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Sunspring Metal is trading on a high P/E or a low P/E, relative to its industry.

Is Sunspring Metal Using Its Retained Earnings Effectively?

The three-year median payout ratio for Sunspring Metal is 26%, which is moderately low. The company is retaining the remaining 74%. By the looks of it, the dividend is well covered and Sunspring Metal is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Sunspring Metal 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.

Conclusion

In total, it does look like Sunspring Metal has some positive aspects to its business. 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. To know the 2 risks we have identified for Sunspring Metal visit our risks dashboard for free.

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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.