Makalot Industrial Co., Ltd. (TPE:1477) On An Uptrend: Could Fundamentals Be Driving The Stock?

Makalot Industrial's (TPE:1477) stock up by 6.2% 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. In this article, we decided to focus on Makalot Industrial's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Makalot Industrial

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 Makalot Industrial is:

21% = NT$2.0b ÷ NT$9.5b (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$0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Makalot Industrial's Earnings Growth And 21% ROE

Firstly, we acknowledge that Makalot Industrial has a significantly high ROE. Secondly, even when compared to the industry average of 8.2% the company's ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for Makalot Industrial in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital

As a next step, we compared Makalot Industrial's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 1.7% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Makalot Industrial fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Makalot Industrial Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 89% (meaning, the company retains only 11% of profits) for Makalot Industrial suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Makalot Industrial has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 84%. Accordingly, forecasts suggest that Makalot Industrial's future ROE will be 23% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Makalot Industrial has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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