Meiloon Industrial Co., Ltd.'s (TPE:2477) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Coorect Its Share Price?

Meiloon Industrial's (TPE:2477) stock is up by a considerable 42% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Meiloon Industrial's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Meiloon Industrial

How To Calculate Return On Equity?

Return on equity 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 Meiloon Industrial is:

8.3% = NT$273m ÷ NT$3.3b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.08.

What Has ROE Got To Do With 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. 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 Meiloon Industrial's Earnings Growth And 8.3% ROE

When you first look at it, Meiloon Industrial's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. As a result, Meiloon Industrial's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared Meiloon Industrial's net income growth with the industry and found that the average industry growth rate was 2.8% 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 Meiloon Industrial fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Meiloon Industrial Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 94% (implying that the company keeps only 6.0% of its income) of its business to reinvest into its business), most of Meiloon Industrial's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Meiloon 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.

Summary

In total, we would have a hard think before deciding on any investment action concerning Meiloon Industrial. 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. So it may be worth checking this free detailed graph of Meiloon Industrial's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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