Taiwan Shin Kong Security Co.,Ltd. (TPE:9925) On An Uptrend: Could Fundamentals Be Driving The Stock?

Taiwan Shin Kong SecurityLtd's (TPE:9925) stock up by 2.6% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, 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 Taiwan Shin Kong SecurityLtd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Taiwan Shin Kong SecurityLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Taiwan Shin Kong SecurityLtd is:

9.6% = NT$982m ÷ NT$10b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 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 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.

A Side By Side comparison of Taiwan Shin Kong SecurityLtd's Earnings Growth And 9.6% ROE

To begin with, Taiwan Shin Kong SecurityLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.6%. As you might expect, the 5.5% net income decline reported by Taiwan Shin Kong SecurityLtd is a bit of a surprise. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared Taiwan Shin Kong SecurityLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 2.6% in the same period.

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. 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 Taiwan Shin Kong SecurityLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Taiwan Shin Kong SecurityLtd Making Efficient Use Of Its Profits?

Taiwan Shin Kong SecurityLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 88% (or a retention ratio of 12%). With only very little left to reinvest into the business, growth in earnings is far from likely.

In addition, Taiwan Shin Kong SecurityLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we do feel that Taiwan Shin Kong SecurityLtd has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Up till now, we've only made a short study of the company's growth data. To gain further insights into Taiwan Shin Kong SecurityLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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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