Do Its Financials Have Any Role To Play In Driving Ta Chen Stainless Pipe Co., Ltd.'s (TWSE:2027) Stock Up Recently?

Most readers would already be aware that Ta Chen Stainless Pipe's (TWSE:2027) stock increased significantly by 7.4% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Ta Chen Stainless Pipe'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Ta Chen Stainless Pipe

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Ta Chen Stainless Pipe is:

7.4% = NT$5.8b ÷ NT$79b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.07 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. 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 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.

A Side By Side comparison of Ta Chen Stainless Pipe's Earnings Growth And 7.4% ROE

When you first look at it, Ta Chen Stainless Pipe's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 10%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Ta Chen Stainless Pipe grew its net income at a significant rate of 25% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Ta Chen Stainless Pipe's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 21% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Ta Chen Stainless Pipe fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ta Chen Stainless Pipe Using Its Retained Earnings Effectively?

The three-year median payout ratio for Ta Chen Stainless Pipe is 39%, which is moderately low. The company is retaining the remaining 61%. By the looks of it, the dividend is well covered and Ta Chen Stainless Pipe is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Ta Chen Stainless Pipe 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.

Summary

In total, it does look like Ta Chen Stainless Pipe has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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