Stock Analysis

Tung Ho Steel Enterprise Corporation's (TPE:2006) Stock Is Going Strong: Have Financials A Role To Play?

TWSE:2006
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Tung Ho Steel Enterprise's (TPE:2006) stock is up by a considerable 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Tung Ho Steel Enterprise's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Tung Ho Steel Enterprise

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' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Tung Ho Steel Enterprise's Earnings Growth And 9.7% ROE

To begin with, Tung Ho Steel Enterprise seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.7%. This probably laid the ground for Tung Ho Steel Enterprise's moderate 7.0% net income growth seen over the past five years.

Next, on comparing Tung Ho Steel Enterprise's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.3% in the same period.

past-earnings-growth
TSEC:2006 Past Earnings Growth November 26th 2020

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. What is 2006 worth today? The intrinsic value infographic in our free research report helps visualize whether 2006 is currently mispriced by the market.

Is Tung Ho Steel Enterprise Using Its Retained Earnings Effectively?

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.

Moreover, Tung Ho Steel Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 76%. However, Tung Ho Steel Enterprise's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Tung Ho Steel Enterprise has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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