Is Formosa Oilseed Processing Co., Ltd.'s (TWSE:1225) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Formosa Oilseed Processing (TWSE:1225) has had a great run on the share market with its stock up by a significant 79% over the last 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. Specifically, we decided to study Formosa Oilseed Processing's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Formosa Oilseed Processing

How Is ROE Calculated?

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 Formosa Oilseed Processing is:

11% = NT$428m ÷ NT$4.0b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Formosa Oilseed Processing's Earnings Growth And 11% ROE

To begin with, Formosa Oilseed Processing seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 8.9%. However, we are curious as to how Formosa Oilseed Processing's decent returns still resulted in flat growth for Formosa Oilseed Processing in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Formosa Oilseed Processing's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.0% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Formosa Oilseed Processing's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Formosa Oilseed Processing Efficiently Re-investing Its Profits?

Formosa Oilseed Processing has a high three-year median payout ratio of 77% (or a retention ratio of 23%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Formosa Oilseed Processing has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Formosa Oilseed Processing certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. You can do your own research on Formosa Oilseed Processing and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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