Ya Horng Electronic Co., Ltd.'s (TPE:6201) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Ya Horng Electronic's (TPE:6201) stock is up by a considerable 11% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Ya Horng Electronic'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Ya Horng Electronic

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 Ya Horng Electronic is:

9.9% = NT$239m ÷ NT$2.4b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.10.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Ya Horng Electronic's Earnings Growth And 9.9% ROE

At first glance, Ya Horng Electronic seems to have a decent ROE. Even so, when compared with the average industry ROE of 13%, we aren't very excited. On further research, we found that Ya Horng Electronic's net income growth of 2.4% over the past five years is quite low. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So there might be other reasons for the earnings growth to be low. These include low earnings retention or poor capital allocation.

We then performed a comparison between Ya Horng Electronic's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.8% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ya Horng Electronic's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ya Horng Electronic Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 91% (or a retention ratio of 8.7%), most of Ya Horng Electronic's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Ya Horng Electronic 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 feel that the performance shown by Ya Horng Electronic can be open to many interpretations. While the company has a decent earnings growth backed by a moderate ROE, we do think that it is reinvesting only a very small portion of its profits, which may hurt future growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Ya Horng Electronic by visiting our risks dashboard for free on our platform here.

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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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