Is Eclat Textile Co., Ltd.'s (TWSE:1476) Recent Performance Tethered To Its Attractive Financial Prospects?

Eclat Textile's (TWSE:1476) stock up by 6.7% 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. Particularly, we will be paying attention to Eclat Textile's ROE today.

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 Eclat Textile

How To Calculate Return On Equity?

The formula for ROE 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$5.8b ÷ NT$24b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.24 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Eclat Textile's Earnings Growth And 24% ROE

To begin with, Eclat Textile has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 7.4% which is quite remarkable. This likely paved the way for the modest 7.7% net income growth seen by Eclat Textile over the past five years.

Next, on comparing with the industry net income growth, we found that Eclat Textile's growth is quite high when compared to the industry average growth of 6.0% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 1476 worth today? The intrinsic value infographic in our free research report helps visualize whether 1476 is currently mispriced by the market.

Is Eclat Textile Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 64% (or a retention ratio of 36%) for Eclat Textile suggests that the company's growth wasn't really hampered despite it returning most of its income to its 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 68%. As a result, Eclat Textile's ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.

Conclusion

On the whole, we feel that Eclat Textile's performance has been quite good. 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. 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.

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