Chunghwa Chemical Synthesis & Biotech Co., Ltd.'s (TPE:1762) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Chunghwa Chemical Synthesis & Biotech (TPE:1762) has had a great run on the share market with its stock up by a significant 9.6% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Chunghwa Chemical Synthesis & Biotech'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.

View our latest analysis for Chunghwa Chemical Synthesis & Biotech

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 Chunghwa Chemical Synthesis & Biotech is:

20% = NT$470m ÷ NT$2.4b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.20.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Chunghwa Chemical Synthesis & Biotech's Earnings Growth And 20% ROE

At first glance, Chunghwa Chemical Synthesis & Biotech seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. Probably as a result of this, Chunghwa Chemical Synthesis & Biotech was able to see a decent growth of 19% over the last five years.

Next, on comparing with the industry net income growth, we found that Chunghwa Chemical Synthesis & Biotech's growth is quite high when compared to the industry average growth of 6.2% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Chunghwa Chemical Synthesis & Biotech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chunghwa Chemical Synthesis & Biotech Making Efficient Use Of Its Profits?

Chunghwa Chemical Synthesis & Biotech has a three-year median payout ratio of 38%, which implies that it retains the remaining 62% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Chunghwa Chemical Synthesis & Biotech 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.

Conclusion

On the whole, we feel that Chunghwa Chemical Synthesis & Biotech's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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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