Is Taiwan Sakura Corporation's (TPE:9911) Latest Stock Performance A Reflection Of Its Financial Health?

Taiwan Sakura (TPE:9911) has had a great run on the share market with its stock up by a significant 5.7% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Taiwan Sakura's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Taiwan Sakura

How To 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 Taiwan Sakura is:

20% = NT$904m ÷ NT$4.6b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.20.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Taiwan Sakura's Earnings Growth And 20% ROE

To start with, Taiwan Sakura's ROE looks acceptable. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. This certainly adds some context to Taiwan Sakura's decent 9.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Taiwan Sakura's growth is quite high when compared to the industry average growth of 2.8% 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Taiwan Sakura's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Taiwan Sakura Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 72% (or a retention ratio of 28%) for Taiwan Sakura suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Taiwan Sakura is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

In total, we are pretty happy with Taiwan Sakura's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Taiwan Sakura and see how it has performed in the past by looking at this FREE detailed graph 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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