Is Great Wall Enterprise Co., Ltd.'s (TPE:1210) Latest Stock Performance Being Led By Its Strong Fundamentals?

Great Wall Enterprise's (TPE:1210) stock is up by 9.9% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Great Wall Enterprise's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Great Wall Enterprise

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 Great Wall Enterprise is:

14% = NT$3.8b ÷ NT$26b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.14.

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. 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.

A Side By Side comparison of Great Wall Enterprise's Earnings Growth And 14% ROE

At first glance, Great Wall Enterprise seems to have a decent ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Probably as a result of this, Great Wall Enterprise was able to see a decent growth of 16% over the last five years.

As a next step, we compared Great Wall Enterprise'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 7.3%.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Great Wall Enterprise is trading on a high P/E or a low P/E, relative to its industry.

Is Great Wall Enterprise Using Its Retained Earnings Effectively?

Great Wall Enterprise has a significant three-year median payout ratio of 61%, meaning that it is left with only 39% 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, Great Wall Enterprise 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 Great Wall Enterprise's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Great Wall Enterprise's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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