Will Weakness in Kuo Yang Construction Co.,Ltd's (TPE:2505) Stock Prove Temporary Given Strong Fundamentals?

Kuo Yang ConstructionLtd (TPE:2505) has had a rough week with its share price down 21%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Kuo Yang ConstructionLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Kuo Yang ConstructionLtd

How Do You Calculate Return On Equity?

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 Kuo Yang ConstructionLtd is:

40% = NT$4.8b ÷ NT$12b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.40 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

A Side By Side comparison of Kuo Yang ConstructionLtd's Earnings Growth And 40% ROE

To begin with, Kuo Yang ConstructionLtd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 7.9% the company's ROE is quite impressive. So, the substantial 71% net income growth seen by Kuo Yang ConstructionLtd over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Kuo Yang ConstructionLtd's growth is quite high when compared to the industry average growth of 3.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Kuo Yang ConstructionLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kuo Yang ConstructionLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 63% (implying that it keeps only 37% of profits) for Kuo Yang ConstructionLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Kuo Yang ConstructionLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Kuo Yang ConstructionLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Kuo Yang ConstructionLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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