Can Taiwan Steel Union Co., Ltd's (TPE:6581) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Taiwan Steel Union (TPE:6581) has had a great run on the share market with its stock up by a significant 16% over the last month. 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. Specifically, we decided to study Taiwan Steel Union's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Taiwan Steel Union

How Is ROE Calculated?

ROE 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 Taiwan Steel Union is:

6.2% = NT$206m ÷ NT$3.3b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.06 in profit.

Why Is ROE Important For 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. 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.

Taiwan Steel Union's Earnings Growth And 6.2% ROE

When you first look at it, Taiwan Steel Union's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.7%. Having said that, Taiwan Steel Union's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared Taiwan Steel Union's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 1.0% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Taiwan Steel Union is trading on a high P/E or a low P/E, relative to its industry.

Is Taiwan Steel Union Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 73% (meaning, the company retains only 27% of profits) for Taiwan Steel Union suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Taiwan Steel Union has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Taiwan Steel Union. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Taiwan Steel Union's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you decide to trade Taiwan Steel Union, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.