Does Sinkang Industries Co., Ltd.'s (TPE:2032) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Sinkang Industries' (TPE:2032) stock increased significantly by 30% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Sinkang Industries' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Sinkang Industries

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Sinkang Industries is:

3.8% = NT$64m ÷ NT$1.7b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.04 in profit.

What Is The Relationship Between ROE And 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. 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.

Sinkang Industries' Earnings Growth And 3.8% ROE

On the face of it, Sinkang Industries' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 5.7% either. As a result, Sinkang Industries' flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that Sinkang Industries' reported growth was lower than the industry growth of 7.3% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sinkang Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sinkang Industries Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 86% (meaning, the company retains only 14% of profits) for Sinkang Industries suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Sinkang Industries has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Sinkang Industries. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Sinkang Industries' past profit growth, check out this visualization 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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