Should Weakness in Taiwan Secom Co., Ltd.'s (TWSE:9917) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 8.9% over the past three months, it is easy to disregard Taiwan Secom (TWSE:9917). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Taiwan Secom's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Taiwan Secom

How Do You Calculate Return On Equity?

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 Secom is:

22% = NT$2.9b ÷ NT$13b (Based on the trailing twelve months to September 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$0.22 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. 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.

A Side By Side comparison of Taiwan Secom's Earnings Growth And 22% ROE

To begin with, Taiwan Secom has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.3% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in Taiwan Secom's meagre five year net income growth average of 4.8%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Taiwan Secom's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 17% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Taiwan Secom fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Taiwan Secom Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 86% (that is, the company retains only 14% of its income) over the past three years for Taiwan Secom suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Taiwan Secom 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.

Summary

On the whole, we do feel that Taiwan Secom has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. 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 1 risk we have identified for Taiwan Secom 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.