Declining Stock and Solid Fundamentals: Is The Market Wrong About Hong Ho Precision Textile Co.,Ltd. (TWSE:1446)?

With its stock down 27% over the past week, it is easy to disregard Hong Ho Precision TextileLtd (TWSE:1446). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Hong Ho Precision TextileLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Hong Ho Precision TextileLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hong Ho Precision TextileLtd is:

52% = NT$1.4b ÷ NT$2.7b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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$0.52.

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 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.

Hong Ho Precision TextileLtd's Earnings Growth And 52% ROE

First thing first, we like that Hong Ho Precision TextileLtd has an impressive ROE. Secondly, even when compared to the industry average of 6.6% the company's ROE is quite impressive. As a result, Hong Ho Precision TextileLtd's exceptional 84% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Hong Ho Precision TextileLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Hong Ho Precision TextileLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hong Ho Precision TextileLtd Making Efficient Use Of Its Profits?

Hong Ho Precision TextileLtd has a really low LTM (or last twelve month) payout ratio of 7.0%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Hong Ho Precision TextileLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Hong Ho Precision TextileLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Hong Ho Precision TextileLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Hong Ho Precision TextileLtd visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.