Lien Hwa Industrial Holdings Corporation's (TPE:1229) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Lien Hwa Industrial Holdings' (TPE:1229) stock is up by 6.1% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Lien Hwa Industrial Holdings' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Lien Hwa Industrial Holdings

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Lien Hwa Industrial Holdings is:

7.8% = NT$3.2b ÷ NT$41b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.08.

What Is The Relationship Between ROE And Earnings Growth?

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

Lien Hwa Industrial Holdings' Earnings Growth And 7.8% ROE

On the face of it, Lien Hwa Industrial Holdings' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. However, the moderate 11% net income growth seen by Lien Hwa Industrial Holdings over the past five years is definitely a positive. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Lien Hwa Industrial Holdings' growth is quite high when compared to the industry average growth of 7.3% 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Lien Hwa Industrial Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Lien Hwa Industrial Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 64% (or a retention ratio of 36%) for Lien Hwa Industrial Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Lien Hwa Industrial Holdings 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 63%. Regardless, the future ROE for Lien Hwa Industrial Holdings is predicted to rise to 11% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Lien Hwa Industrial Holdings has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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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