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 3.1% over the past month. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. In this article, we decided to focus on evertex fabrinology's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for evertex fabrinology

How Is ROE Calculated?

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' is the income the business earned 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$0.03 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. 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 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.

evertex fabrinology's Earnings Growth And 3.4% ROE

At first glance, evertex fabrinology's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.1%. Therefore, evertex fabrinology's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

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 1.5% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Making Efficient Use Of Its Profits?

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.

Moreover, evertex fabrinology has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on evertex fabrinology. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on evertex fabrinology and see how it has performed in the past by looking at this FREE detailed graph 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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