Will Weakness in Chin Hsin Environ Engineering Co., Ltd.'s (TWSE:6951) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 12% over the past week, it is easy to disregard Chin Hsin Environ Engineering (TWSE:6951). 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. In this article, we decided to focus on Chin Hsin Environ Engineering's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Chin Hsin Environ Engineering

How To Calculate Return On Equity?

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 Chin Hsin Environ Engineering is:

18% = NT$183m ÷ NT$1.0b (Based on the trailing twelve months to September 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$0.18 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Chin Hsin Environ Engineering's Earnings Growth And 18% ROE

To begin with, Chin Hsin Environ Engineering seems to have a respectable ROE. Especially when compared to the industry average of 9.3% the company's ROE looks pretty impressive. Probably as a result of this, Chin Hsin Environ Engineering was able to see an impressive net income growth of 39% 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.

We then compared Chin Hsin Environ Engineering'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 18% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chin Hsin Environ Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chin Hsin Environ Engineering Efficiently Re-investing Its Profits?

Chin Hsin Environ Engineering has a significant three-year median payout ratio of 70%, meaning the company only retains 30% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

While Chin Hsin Environ Engineering has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Chin Hsin Environ Engineering's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Chin Hsin Environ Engineering'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. 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.