San Neng Group Holdings Co., Ltd.'s (TPE:6671) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

San Neng Group Holdings' (TPE:6671) stock up by 3.7% over the past month. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Specifically, we decided to study San Neng Group Holdings' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for San Neng Group Holdings

How Do You 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 San Neng Group Holdings is:

14% = NT$226m ÷ NT$1.6b (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$0.14.

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. 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.

San Neng Group Holdings' Earnings Growth And 14% ROE

At first glance, San Neng Group Holdings seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. For this reason, San Neng Group Holdings' five year net income decline of 16% raises the question as to why the decent ROE didn't translate into growth. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

That being said, we compared San Neng Group Holdings' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 2.8% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is 6671 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is San Neng Group Holdings Efficiently Re-investing Its Profits?

San Neng Group Holdings' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 94% (or a retention ratio of 6.0%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 3 risks we have identified for San Neng Group Holdings.

In addition, San Neng Group Holdings only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

Overall, we have mixed feelings about San Neng Group Holdings. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into San Neng Group Holdings' past profit growth, check out this visualization 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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