Will Weakness in Makalot Industrial Co., Ltd.'s (TWSE:1477) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Makalot Industrial's (TWSE:1477) recent performance, when its stock has declined 4.4% over the past three months. 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 Makalot Industrial's ROE.

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.

Check out our latest analysis for Makalot Industrial

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 Makalot Industrial is:

32% = NT$4.2b ÷ NT$13b (Based on the trailing twelve months to March 2024).

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$0.32 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Makalot Industrial's Earnings Growth And 32% ROE

Firstly, we acknowledge that Makalot Industrial has a significantly high ROE. Secondly, even when compared to the industry average of 7.3% the company's ROE is quite impressive. This probably laid the groundwork for Makalot Industrial's moderate 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Makalot Industrial's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is 1477 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Makalot Industrial Efficiently Re-investing Its Profits?

Makalot Industrial has a significant three-year median payout ratio of 85%, meaning that it is left with only 15% 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.

Besides, Makalot Industrial has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 87%. Accordingly, forecasts suggest that Makalot Industrial's future ROE will be 32% which is again, similar to the current ROE.

Summary

On the whole, we feel that Makalot Industrial's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com