Eclat Textile Co., Ltd.'s (TWSE:1476) Stock Been Rising: Are Strong Financials Guiding The Market?

Eclat Textile's (TWSE:1476) stock up by 9.3% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Eclat Textile's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Eclat Textile

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 Eclat Textile is:

24% = NT$6.1b ÷ NT$25b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.24 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.

Eclat Textile's Earnings Growth And 24% ROE

Firstly, we acknowledge that Eclat Textile has a significantly high ROE. Secondly, even when compared to the industry average of 7.2% the company's ROE is quite impressive. This probably laid the groundwork for Eclat Textile's moderate 7.9% net income growth seen over the past five years.

As a next step, we compared Eclat Textile's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 1476 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Eclat Textile Efficiently Re-investing Its Profits?

Eclat Textile has a significant three-year median payout ratio of 64%, meaning that it is left with only 36% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Eclat Textile is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%. Accordingly, forecasts suggest that Eclat Textile's future ROE will be 26% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Eclat Textile's 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.