Most readers would already be aware that Tung Ho Steel Enterprise's (TPE:2006) stock increased significantly by 17% over the past month. 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 Tung Ho Steel Enterprise's ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You 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 Tung Ho Steel Enterprise is:
9.7% = NT$2.4b ÷ NT$25b (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings 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$0.10 in profit.
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.
Tung Ho Steel Enterprise's Earnings Growth And 9.7% ROE
To start with, Tung Ho Steel Enterprise's ROE looks acceptable. Especially when compared to the industry average of 4.5% the company's ROE looks pretty impressive. Probably as a result of this, Tung Ho Steel Enterprise was able to see a decent growth of 7.0% over the last five years.
Next, on comparing with the industry net income growth, we found that Tung Ho Steel Enterprise's growth is quite high when compared to the industry average growth of 5.4% in the same period, which is great to see.
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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 2006? You can find out in our latest intrinsic value infographic research report.
Is Tung Ho Steel Enterprise Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 94% (or a retention ratio of 6.0%) for Tung Ho Steel Enterprise suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Tung Ho Steel 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 81% of its profits over the next three years. Regardless, the future ROE for Tung Ho Steel Enterprise is predicted to rise to 13% despite there being not much change expected in its payout ratio.
Overall, we feel that Tung Ho Steel Enterprise certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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