Should Weakness in Mercuries & Associates Holding, Ltd.'s (TPE:2905) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Mercuries & Associates Holding (TPE:2905) has had a rough three months with its share price down 8.5%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Mercuries & Associates Holding'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.

See our latest analysis for Mercuries & Associates Holding

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Mercuries & Associates Holding is:

8.6% = NT$3.7b ÷ NT$43b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.09 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Mercuries & Associates Holding's Earnings Growth And 8.6% ROE

When you first look at it, Mercuries & Associates Holding's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. Even so, Mercuries & Associates Holding has shown a fairly decent growth in its net income which grew at a rate of 8.4%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Mercuries & Associates Holding's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.4% in the same period.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is 2905 worth today? The intrinsic value infographic in our free research report helps visualize whether 2905 is currently mispriced by the market.

Is Mercuries & Associates Holding Making Efficient Use Of Its Profits?

Mercuries & Associates Holding has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Mercuries & Associates Holding has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Mercuries & Associates Holding has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Mercuries & Associates Holding.

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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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