Has Shin Foong Specialty and Applied Materials Co., Ltd.'s (TPE:6582) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Shin Foong Specialty and Applied Materials' (TPE:6582) stock increased significantly by 11% over the past week. 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 Shin Foong Specialty and Applied Materials' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shin Foong Specialty and Applied Materials

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 Shin Foong Specialty and Applied Materials is:

26% = NT$1.1b ÷ NT$4.0b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.26 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shin Foong Specialty and Applied Materials' Earnings Growth And 26% ROE

Firstly, we acknowledge that Shin Foong Specialty and Applied Materials has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.7% which is quite remarkable. Despite this, Shin Foong Specialty and Applied Materials' five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Shin Foong Specialty and Applied Materials' reported growth was a little less than the industry growth of1.0% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Shin Foong Specialty and Applied Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Shin Foong Specialty and Applied Materials Using Its Retained Earnings Effectively?

Shin Foong Specialty and Applied Materials has a high three-year median payout ratio of 88% (or a retention ratio of 12%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Shin Foong Specialty and Applied Materials 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.

Conclusion

On the whole, we do feel that Shin Foong Specialty and Applied Materials has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Shin Foong Specialty and Applied Materials' 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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