Could The Market Be Wrong About Advanced Energy Solution Holding Co., Ltd. (TWSE:6781) Given Its Attractive Financial Prospects?

Advanced Energy Solution Holding (TWSE:6781) has had a rough week with its share price down 4.8%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Advanced Energy Solution Holding's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Advanced Energy Solution Holding

How To Calculate Return On Equity?

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 Advanced Energy Solution Holding is:

13% = NT$1.8b ÷ NT$14b (Based on the trailing twelve months to March 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$0.13 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. 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.

Advanced Energy Solution Holding's Earnings Growth And 13% ROE

To start with, Advanced Energy Solution Holding's ROE looks acceptable. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. Probably as a result of this, Advanced Energy Solution Holding was able to see an impressive net income growth of 26% over the last five years. We reckon that there could also 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.

As a next step, we compared Advanced Energy Solution Holding'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 15%.

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. Is Advanced Energy Solution Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Advanced Energy Solution Holding Efficiently Re-investing Its Profits?

Advanced Energy Solution Holding has a three-year median payout ratio of 50% (where it is retaining 50% of its income) which is not too low or not too high. So it seems that Advanced Energy Solution Holding is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Advanced Energy Solution Holding is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 50%. Regardless, the future ROE for Advanced Energy Solution Holding is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Advanced Energy Solution Holding'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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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