evertex fabrinology limited's (TPE:1470) Financial Prospects Don't Look Very Positive: Could It Mean A Stock Price Drop In The Future?

evertex fabrinology's (TPE:1470) stock is up by 2.0% over the past week. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to evertex fabrinology's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for evertex fabrinology

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for evertex fabrinology is:

3.4% = NT$32m ÷ NT$943m (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$0.03 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

evertex fabrinology's Earnings Growth And 3.4% ROE

On the face of it, evertex fabrinology's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.2% either. Hence, the flat earnings seen by evertex fabrinology over the past five years could probably be the result of it having a lower ROE.

We then compared evertex fabrinology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 1.7% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. 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 evertex fabrinology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is evertex fabrinology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 96% (implying that the company keeps only 4.1% of its income) of its business to reinvest into its business), most of evertex fabrinology's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, evertex fabrinology 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

Overall, we would be extremely cautious before making any decision on evertex fabrinology. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of evertex fabrinology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you decide to trade evertex fabrinology, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.