Feng Tay Enterprises Co., Ltd.'s (TPE:9910) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 8.4% over the past month, it is easy to disregard Feng Tay Enterprises (TPE:9910). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Feng Tay Enterprises' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Feng Tay Enterprises

How Do You Calculate Return On Equity?

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 Feng Tay Enterprises is:

31% = NT$5.7b ÷ NT$19b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.31 in profit.

What Has ROE Got To Do With 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. 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.

Feng Tay Enterprises' Earnings Growth And 31% ROE

To begin with, Feng Tay Enterprises has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.2% the company's ROE is quite impressive. Probably as a result of this, Feng Tay Enterprises was able to see a decent net income growth of 7.9% over the last five years.

Next, on comparing with the industry net income growth, we found that Feng Tay Enterprises' growth is quite high when compared to the industry average growth of 1.7% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 9910 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Feng Tay Enterprises Using Its Retained Earnings Effectively?

While Feng Tay Enterprises has a three-year median payout ratio of 72% (which means it retains 28% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, Feng Tay Enterprises has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 75% of its profits over the next three years. Accordingly, forecasts suggest that Feng Tay Enterprises' future ROE will be 32% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Feng Tay Enterprises' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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