Taiyen Biotech Co., Ltd. (TPE:1737) Stock's On A Decline: Are Poor Fundamentals The Cause?

Taiyen Biotech (TPE:1737) has had a rough three months with its share price down 2.3%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Taiyen Biotech's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Taiyen Biotech

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 Taiyen Biotech is:

5.0% = NT$315m ÷ NT$6.2b (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$0.05.

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. 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. 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.

Taiyen Biotech's Earnings Growth And 5.0% ROE

On the face of it, Taiyen Biotech's ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 3.0% seen by Taiyen Biotech over the past five years could probably be the result of the low ROE.

We then compared Taiyen Biotech's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.3% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Taiyen Biotech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Taiyen Biotech Making Efficient Use Of Its Profits?

Taiyen Biotech has a three-year median payout ratio of 85% (implying that it keeps only 15% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Taiyen Biotech has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Taiyen Biotech. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard will have the 1 risk we have identified for Taiyen Biotech.

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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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