Is Farcent Enterprise Co., Ltd's (TPE:1730) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that Farcent Enterprise's (TPE:1730) stock increased by 1.3% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Farcent Enterprise's ROE.

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

Check out our latest analysis for Farcent Enterprise

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 Farcent Enterprise is:

22% = NT$394m ÷ NT$1.8b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.22 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.

Farcent Enterprise's Earnings Growth And 22% ROE

First thing first, we like that Farcent Enterprise has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. As a result, Farcent Enterprise's exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Farcent Enterprise's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 33% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 1730? You can find out in our latest intrinsic value infographic research report

Is Farcent Enterprise Using Its Retained Earnings Effectively?

Farcent Enterprise has a significant three-year median payout ratio of 68%, meaning the company only retains 32% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Farcent 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.

Conclusion

Overall, we feel that Farcent Enterprise certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Up till now, we've only made a short study of the company's growth data. You can do your own research on Farcent Enterprise 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. 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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